Elon Buys 9.2% of Twitter, and Starbucks Suspend $20B Buyback Program
This morning I had two of my larger holdings, Starbucks and Twitter, become embroiled in headlines. It was announced this morning that Twitter has a new shareholder, Elon Musk, and that Starbucks would be axing their $20B buyback program as Howard Schultz looks to make a stamp on his welcoming party.
Whilst I am in the middle of writing some other reports, I felt compelled to share some insights and commentary on both of these events this morning, given that they are timely.
Twitter & Their New Shareholder
Shares of Twitter were trading as high as +26% in the early pre-market hours this morning, after an SEC filing from Twitter shows that Elon Musk, founder and current CEO of Tesla has acquired a "passive" but sizeable 9.2% ownership stake of Twitter (~73.5M shares).
This comes after Musk tweeted a poll a few weeks back asking if Twitter adheres to the principle of free speech, warning voters that "the consequences of this poll will be important".
In a conversation with Leandro from Best Anchors, I remarked that this is why investing is so funny to me. You can have a fundamental-based thesis, and then some billionaire overlord just comes along and does this. To be fair, he did imply something like this might happen and I am sure there were some speculators out there who were trying to scalp alpha on this event. Kudos to them. When asked for my initial quick take, my response was as follows:
“There isn't a great deal they could have done to prevent Elon from buying a stake, and I'm not sure they [TWTR management] care too much about the share price. For what they are trying to do, the jury is still out. I think by 2023, the end of their "plan", that’s when conclusions can be drawn. Activism or larger profile events like this often drive ST returns. I remember a similar occurrence back in 2020. That activism actually did alter the dynamic a little. More focus on buybacks, more focus on shifting to revenue as the north star, Jack was given a shorter leash and eventually left. For Elon specifically, I think this makes him the largest individual shareholder now. Seems natural that he wants to address the perceived 'free speech' complaints. He has shown he knows how to drive value in a business (both fundamentally and for the stock price). Unsure as to the extent of his desired involvement. Still digesting it really, but TBD on how this impacts the fundamental side of what Twitter is shooting for.”
Takeaway: My takeaway, which will no doubt evolve as more information comes to light, is that this doesn't immediately alter anything with regard to my Twitter thesis. I mostly encourage activism, but whether or not Elon’s angle (assumed to be free speech) interrupts Twitter’s current focus, on revenue and product velocity, is to be determined. The most important aspect at this time is ascertaining just how active/passive Elon wishes to be. I assume the former.
Starbucks Slash Their Buyback
In a message to Starbucks stakeholders this morning, Howard Schultz, the newly minted, third-time, CEO of Starbucks outlined his decision to cut the sizeable $20B capital allocation program that outgoing CEO, Kevin Johnson, had recently enacted.
The three points he touched upon in the letter are as follows:
Buyback Suspension: "Starting immediately, we are suspending our share repurchasing program. This decision will allow us to invest more profit into our people and our stores — the only way to create long-term value for all stakeholders."
Connecting with Partners: "In the weeks ahead, I will be travelling, along with our leaders, to connect with partners in our stores and manufacturing plants around the world to understand your thinking and ideas about how to build this next Starbucks."
Redesigning Culture: "And beyond, we will then engage in design sessions with partners of all levels across the organization to co-create a future of mutual thriving in a multi-stakeholder era. We see these sessions as the deepest form of inventing together we’ve ever attempted as a community."
An interesting situation that requires nuance. Given that Schultz is the new CEO, he has the right to tailor his tenure to his own vision. He did not enact this buyback program, thus he is not required to see it through. With the light of the union bursting through the seams of the Starbucks company culture, freeing up this momentous amount of capital to "invest more into our people and our stores" seems like a nod to Schultz admitting that these concerns need to be taken more seriously. For me on the Union see “SBUX: Union, What Union?” and “SBUX: Howard Schultz is BACK”.
As such, whilst the move might oft be seen as a negative, in this case, it might be a positive for the LT health of the company. The reason people flock to Starbucks is not because of the Michelin grade coffee (lack thereof), it's because of the consistency, and the quality of the service. That service is provided by partners. Unhappy partners untangle that whole flywheel of value.
That’s one side of the argument, but here’s the other. Removing the buyback program could be construed as a dividend cut to shareholders. Post M remarked this morning that:
“Starbucks announced that it’s suspending its buyback program. A company that repurchased ~$15b since 2019. The equivalent to a 5% dividend. Why is this news received so much better than a dividend suspension from a large multinational company?”
Which sparked a lot of interesting debate. Todd Wenning at Ensemble Capital rebutted with; “Right or wrong, buybacks are considered discretionary and dividends as commitments.” Followed up by stating:
“Another way to think about it is if a company pays a regular dividend that’s growing and pays a discretionary special dividend that fluctuates each year (sometimes big sometimes nothing), the stock is unlikely to get dinged in an off year for the special.” But boiling his point down to “dividends hit the bank account directly and get noticed”, whilst share repurchases, do not.
I suspect (based on rough numbers) that this will see Starbucks drop an incremental $9B or so that would have once been authorised to share repurchases across 2022/23/24. In a prior post, I guesstimated that ~$12B of that $20B program would have been distributed as share repurchases across 2022/24 (the remainder being dividends). Around 29% of that $12B was used up in Q1 ($3.5B), so my guess is that Starbucks is freeing up ~$9B of capital here. Whilst it may be a LT positive for the business, the EPS guidance over this period will have to be brought down a peg or three. Therein follows a discussion of the nuances between being a great business analyst and a great security analyst.
But here’s another take. As Forward Cap has flagged in the past, this makes Starbucks’ capital allocation policy look, well, undisciplined. From $2B in 2017 to $17.3B across 2018/19, to $1.7B in the following two years, and then a fresh $20B policy in 2022, which was then reversed only months later.
One can’t be ignorant of the nuances surrounding a new CEO, and a direction change, but the fact remains. Buybacks have been a topical issue of late, leaving investors questioning just how efficient they are as a means of capital distribution. Take Facebook for instance. The $33.6B they repurchased in H2 2021 (at prices between $335 and $360 per share) were quickly made to look foolish once the share price cratered to lows of $186 in March (and modestly improved to $225 later).
Not only was it the price of the shares at the time, but the momentous hike in the volume of repurchases. Under the logic Facebook has applied, one would assume they throw the kitchen sink at share repurchases at these levels?
Takeaway: But back to Starbucks. Is this repurchase kerfuffle damning to the LT operations of Starbucks as a global coffee merchant? No. Does it leave bitter notes on the palette? Somewhat. The near-term future for Starbucks looks like increased labour costs accompanied by suppressed earnings numbers on the back of the revised share repurchases. Like a broken record, I will once again cite that this does not bode well for their LT EBIT target (18.5%) which was previously pushed out to 2024, after being pushed to 2023 during Covid). Naturally, the market has to price in this new reality, so we may see Starbucks continue its 30% drawdown from ATHs in July of 2021.
But that’s just my quick take, I would be interested to hear your thoughts in the comments section.
Newsletter: I remarked in the latest edition of Market Talk that I had begun to carve out dedicated writing time each morning once again after taking a short break. I am finding this has rejuvenated my energy for writing.
Author of Investment Talk