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Category: Data Updates

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

by Aswath Damodaran

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?

by Aswath Damodaran

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

by Aswath Damodaran

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

by Aswath Damodaran

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...)

Data Update 3 for 2023: Inflation and Interest Rates

by Aswath Damodaran

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...)

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

by Aswath Damodaran

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!

by Aswath Damodaran

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...)

Data Update 5 for 2022: The Bottom Line!

by Aswath Damodaran

The proverbial bottom line for success in business is the capacity to deliver profits, at least in the long term. Even though we live in an age where user platforms and hyper revenue growth can drive company valuations, that adage remains true. In fact, questions about profitability seem to have taken center place again, not only because a market pull back is a reminder that growth, by itself, cannot deliver value, but also because there are still unresolved debates about how much damage the COVID crisis did to earnings power at companies, and whether this damage has been healed, as economies have opened up. In this post, I will look at corporate profitability, in all its different dimensions, and how companies across the globe, and across industries, measured up in the most recent years. 

Measuring Profitability
    The question of whether a company is making or losing money should be a simple one to answer, especially in an age where accounting statements are governed by a myriad of rules, and a legion of number-crunchers follow these rules to report profits generated by a firm. In practice, though, measuring profitability is anything but straightforward, as accountants have devised multiple measures of profitability, reserving discretion on how to compute each one, and many different ways of scaling these profits, for comparisons.

Accounting Profit Measures
    To understand the different measures of accounting profit, let us look at how each measure of profit is computed in an income statement. In the table (Read more...)

Data Update 1 for 2021: A (Data) Look Back at a Most Forgettable Year (2020)!

by Aswath Damodaran

I spent the first week of 2021 in the same way that I have spent the first week of every year since 1995, collecting data on publicly traded companies and analyzing how they navigated the cross currents of the prior year, both in operating and market value terms. I knew that this year would be more challenging than most other years, for two reasons. The first was that the shut down of the global economy, initiated by the spreading of COVID early last year, had significant effects on the operations of  companies in different sectors, and across the world. The second was that, starting mid-year in 2020, equity markets and the real economy moved in different directions, with the former rising on the expectations a post-virus future, and the latter languishing, as most of the world continued to operate with significant constraints. In this post, I will start with a rationalization of why I do this data analysis every year, follow up with a description (geographic and sector) of the overall universe of companies that are in my analysis, list out the variables that I estimate and report, and conclude with a short caveat about 2020 data.

Data: A Pragmatist View

We live in the age of data worship, where investors, analysts and businesses all seem to have bought into the idea that big data has answers for every question and that collecting the data (or paying for it) will create positive payoffs. I am a skeptic and I have (Read more...)

Data Update 1 for 2021: A (Data) Look Back at a Most Forgettable Year (2020)!

by Aswath Damodaran

I spent the first week of 2021 in the same way that I have spent the first week of every year since 1995, collecting data on publicly traded companies and analyzing how they navigated the cross currents of the prior year, both in operating and market value terms. I knew that this year would be more challenging than most other years, for two reasons. The first was that the shut down of the global economy, initiated by the spreading of COVID early last year, had significant effects on the operations of  companies in different sectors, and across the world. The second was that, starting mid-year in 2020, equity markets and the real economy moved in different directions, with the former rising on the expectations a post-virus future, and the latter languishing, as most of the world continued to operate with significant constraints. In this post, I will start with a rationalization of why I do this data analysis every year, follow up with a description (geographic and sector) of the overall universe of companies that are in my analysis, list out the variables that I estimate and report, and conclude with a short caveat about 2020 data.

Data: A Pragmatist View

We live in the age of data worship, where investors, analysts and businesses all seem to have bought into the idea that big data has answers for every question and that collecting the data (or paying for it) will create positive payoffs. I am a skeptic and I have (Read more...)