Author: Aswath Damodaran

Data Update 7 for 2023: Dividends, Buybacks and Cash Flows

This is the last of my data update posts for 2023, and in this one, I will focus on dividends and buybacks, perhaps the most most misunderstood and misplayed element of corporate finance. To illustrate the heat that buybacks evoke, consider two stories in the last two weeks where they have been in the news. In the first, critics of Norfolk Southern, the corporation that operates the trains that were involved in a dreadful chemical accident in Ohio, pointed to buybacks that it had done as the proximate cause for brake failure and the damage. In the second, Warren Buffet used some heated language to describe those who opposed buybacks, calling them “economic illiterates” and “silver tongued demagogues “. Going back in time to last year’s inflation reduction act, buybacks were explicitly targeted for taxes, with the perspective that they were damaging US companies. I think that there are legitimate questions worth asking about buybacks, but I don’t think that neither the critics nor the defenders of buybacks seem to understand why their use has surged or their impact on shareholders, businesses and the economy.

Dividend Policy in Corporate Finance

    To understand where dividend policy fits in the larger context of running a business, consider the following big picture description of corporate finance, where every decision that a business makes is put into one of three buckets - investing, financing and dividends, with each one having an overriding principle governing decision-making within its contours.

In my fifth data (Read more...)

Data Update 6 for 2023: A Wake up call for the Indebted?

We have an uneasy relationship with debt, both in our personal and business lives. While it is a financial decision, it is one that is freighted with moral overtones, since almost every religion inveighs against debt's sins, labeling those who lend as sinners and those who borrow as weak. That may reflect the concern that once a person or entity starts borrowing to fund its needs, it is easy to overuse debt, and risk its wellbeing in the process. All that said, businesses around the world have borrowed money though time to fund their operations, sometimes for good reasons and sometimes for bad, and over time, these businesses have also faced cycles of too much debt leading to painful cleansing. In this post, I will focus on corporate debt in 2023, keeping in mind that it was a year where the tradeoffs changed, as interest rates rose to pre-2008 levels, and putting at risk those firms that had borrowed to capacity, or even beyond, at low interest rates.

Debt's place in business

    To understand debt's role in a business, I will start with a big picture perspective, where you break a business down into assets-in-place, i.e., the value of investments it has already made and growth assets, the value of investments you expect it to make in the future. To fund the business, you can either use borrowed money (debt) or owner's funds (equity), and while both are sources of capital, they represent different claims on the business. (Read more...)

Data Update 5 for 2023: The Earnings Test

As I have argued in all four of my posts, so far, about 2022, it was year when we saw a return to normalcy on many fronts, as treasury rates reverted back to pre-2008 levels, and risk capital discovered that risk has a downside. During the course of the year, investors also rediscovered that the essence of business is not growing revenues or adding users, but making profits from that growth. In this post, I will focus on trend lines in profitability at companies in 2022, with the intent of addressing multiple questions. The first is to see how the increase in inflation in 2021 and 2021 has played out in profitability for companies, since inflation can increase profits for some firms, and lower them for others. The second is on whether these profit effects vary across geographies and sectors, by estimating profitability measures across regions and industries. The third is to revisit the link between profitability and value at companies, since making money is a first step for any business to survive, but making enough money to create value in business is a much more stringent test for businesses, and one that many fail.

Profits: Levels and Trends

   The end game for any business, no matter how noble its mission and how much good its products and services do, is to make money, since without profits, the business will soon run out of capital and sink into oblivion. That said, if you own the business, you may decide (Read more...)

Data Update 4 for 2023: Country Risk – Measures and Implications

I describe myself as a dabbler, and it does get in the way of my best laid plans. A few weeks ago, I posted my first data update pulling together what I had learned from looking at the data in 2023, and promised many more on the topic. In the month since, I have added two more data updates, one on US equities and one on interest rates, but my attention was drawn away by other interesting stories. Thus, I took a detour to value Tesla, around the time of their most recent earnings report on January 26, and added a second post to respond to the pushback that I got. About a week and a half ago, just as I was getting ready to start on my fourth data update, I got distracted again, this time by a story of a short seller (Hindenburg) targeting one of India's most visible companies (Adani Group) and I don't regret it, because that story is a good lead in to talking about country risk, which is the topic of my fourth data update. Irrespective of whether you think Hindenburg's short selling thesis against the Adani Group has legs, it is undeniable that the fate and value of this family group's companies is intertwined with the India story. A strongly growing India needs massive investments in infrastructure to succeed, and the Adani Group seemed uniquely qualified because of its perceived capacity to deliver on its promises, as well as its (Read more...)

Control, Complexity and Politics: Deconstructing the Adani Affair!

The India Rising story hit some turbulence last week, as one of its biggest corporate success stories, the Adani Group, was hit with a report from Hindenburg Research, an investing group that specializes in targeting and shorting companies that it believes have dubious accounting and business practices. In response, people have fallen into two groups, with the Adani family and its supporters arguing that the short selling report is a hit job by a "foreign" entity to bring down not just the company, but also the country, and others noting that the report just reinforces what has troubled them about the company's meteoric rise in the last decade. I will confess that I know very little about the Adani Group, and I have nothing invested financially or emotionally in the company's fortunes. If you are looking for advice on whether you should buy or sell Adani shares, based upon my analysis, you will be disappointed. Instead, I will argue that the ingredients that led to the Adani stock price meltdown last week, which include an ambitious family group obsessed with control, a financial market where trading momentum trumps financial fundamentals and a capital market (debt and equity) where governments and regulators put their thumbs on the scale, are embedded in many Indian companies, and represent the weakest links in the India story.

The Lead In

    As noted in the introductory paragraph, I start from a position of ignorance about the Adani Group, and it thus made sense to (Read more...)

Disagreements and First Principles: The Pushback on my Tesla Valuation

I wrote about my most recent valuation of Tesla just over a week ago, and as has always been the case when I value this company, I have heard from both sides of the Tesla divide. Some of you believe that I am being far too generous in my forecasts of revenues and profitability for a company that is facing significant competition, as it pursues growth, especially with questions about who's in charge of the company. Others, just as passionately, have argued that I am under estimating the company's capacity to grow, enter new businesses and generate additional profits, and have pointed to my history of undershooting with the company. I am not defensive about my valuations, and am completely unfazed by the pushback, but I do think that since some of the pushback revolves around first principles of intrinsic value, rather than specifics about the company, there is value in discussing the issues raised.

My Tesla Valuation: Filling in the Missing Pieces

    When I posted my Tesla valuation, I hoped, perhaps naively, that it would be self-standing, with the combination of the valuation picture and the spreadsheet filling in the details. Based at least on the reactions, I have realized that some may be misreading my story and valuation, ore reacting just to a picture in a tweet. To fill in the missing pieces, I redid the valuation picture, adding the revenue growth rate, by year:

Download spreadsheet
As you look at the sheet, it (Read more...)

Data Update 3 for 2023: Inflation and Interest Rates

If 2022 was an unsettling year for equities, as I noted in my second data post, it was an even more tumultuous year for the bond market. The US treasury market, considered by some still as a safe haven, was anything but safe or a haven, especially at the long maturities, as long term rates soared, with inflation (not the Fed) being the key driver. As a result, treasury bond investors faced one of their worst years in history, losing close to a fifth of their principal, as bonds were repriced. The rise in rates transmitted to corporate bond market rates, with a concurrent rise in default spreads exacerbating the damage to investors. Just as rising equity risk premiums push up the cost of equity, rising default spreads push up the cost of debt of companies, with the added complication of higher default risk for those companies that had pushed to the limits of their borrowing capacity in a low interest-rate environment.  

US Treasuries: Risk and Time Horizon

In classrooms and in wealth managers’ offices, it has been standard practice to push US treasuries and highly rated corporate bonds as safe, and even with price changes factored in, as a portfolio stabilizer, with a mix of stocks and bonds forming a “balanced” portfolio. That is good advice in most years, but 2022 was not one of those years.

US Treasury Rates and Returns in 2022

   To say that 2022 was an eventful year for US treasuries is (Read more...)

Tesla in 2023: A Return to Reality, The Start of the End or Time to Buy?

I am not much of a car person and view cars primarily as a mode of transportation. I drive a 2010 Honda Civic, a perfectly serviceable vehicle that is never going to get oohs and ahas from onlookers, but I feel no urge to value Honda. I don't own a Tesla, and have only driven someone else's Tesla, but as readers of this blog know, I valued Tesla for the first time in 2014, and I keep returning to the scene of the crime.  One reason is that no matter what you think of Elon Musk and Tesla, they are never boring,  and interesting companies are much more fun to value than boring ones. Another is that when valuing companies, I am, in addition to valuing a company to see if it is fairly priced,  interested into the broader insights about business and valuation that emerge from the company. Thus, almost everything I know and practice, when valuing young and start-up companies, I learned in the process of valuing Amazon in the 1990s. In the same vein, I have learned a great about the power of disruption and the capacity of a young company (and its founder) to change the way a large, inertia-bound business is run, in the process of valuing Tesla. As I will note in more detail in the post, I have been wrong, and sometimes hopelessly so, in some of my earlier valuations of Tesla, but that does not stop me from trying anew. It is (Read more...)

Data Update 2 for 2023: A Rocky Year for Equities!

It is the nature of stocks that you have good years and bad ones, and much as we like to forget about the latter during market booms, they recur at regular intervals, if for no other reason than to remind us that risk is not an abstraction, and that stocks don't always win, even in the long term. In 2022, we needed that reminder more than ever before, especially after markets came roaring back from the COVID drop in 2020 and 2021. While there are many events during 2022, some political and some economic, that one can point to as the reason for poor stock returns, it is undeniable that inflation was the driving force behind the market correction. In this post, I will begin by chronicling the damage done to equities during 2022, before putting the year in historical context, and then examine how developments during the year have affected expectations for the future. I will follow up by looking at the mechanics that connect stock prices to inflation, and examine why the damage from higher inflation can vary across companies and sectors. 

Stocks: The What?

We invest in equities expecting to earn more than we can make on risk free or guaranteed investments, but the risk in equities is that actual returns can deviate from expectations. In some years, those deviations work to our benefit and in others, it can hurt us, and 2022, unfortunately, fell into the latter column. In this section, I will begin with a (Read more...)

Data Update 1 for 2023: Setting the table!

In my last post, I talked about the ritual that I go through every year ahead of my teaching each spring, and in this one, I will start on the first of a series of posts that I make at the start of each year, where I look at data, both macro and company-level. In this post, I will provide a motivation, if you need one, for why I create and share the data updates, followed up by a description of my data sample, which includes publicly traded companies listed and traded across the world, as well as the data variables that I estimate and report.

Data: Trickle to a Flood!
    It is perhaps a reflection of my age that I remember when getting data to do corporate financial analysis or valuation was a chore. To obtain company-level information, you needed to find its annual reports in physical form and for industry-level data, you were dependent on services that computed and reported industry averages, such as Value Line and S&P. The times have changed, and if there is a problem now, it is that we have too much data, rather than too little. As I noted in my posts on data disclosure last year, this has led to at least three unhealthy developments. 
  1. Data distractions: Faced with massive amounts of data, quantitative as well as qualitative, many investors and analysts find themselves distracted by immaterial, irrelevant and sometimes misleading data points along the way. 
  2. Data as a (Read more...)