Yeah, It’s Still Water

PDF Download (Paid Subscription Required): Yeah, It’s Still Water

Back in April, I wrote This Is Water.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

David Foster Wallace (2005)

It’s a note about financialization … the zombiefication of our economy and the oligarchification of our society.

Financialization is profit margin growth without labor productivity growth.

Financialization is the zero-sum game aspect of capitalism, where profit margin growth is both pulled forward from future real growth and pulled away from current economic risk-taking.

Financialization is the smiley-face perversion of Smith’s invisible hand and Schumpeter’s creative destruction. It is a profoundly repressive political equilibrium that masks itself in the common knowledge of “Yay, capitalism!”.

What does Wall Street get out of financialization? A valuation story to sell.

What does management get out of financialization? Stock-based compensation.

What does the Fed get out of financialization? A (very) grateful Wall Street.

What does the White House get out of financialization? Re-election.

What do YOU get out of financialization?

You get to hold up a card that says “Yay, capitalism!”.

So anyway, there I was yesterday, minding my own business, and I saw a tweet about Texas Instruments (TXN) and how they were getting slammed after a difficult earnings call. Sometimes I can’t help myself, so I wrote this:

It’s a popular tweet. An excellent ratio, if you’re into that sort of inside-baseball social media stuff, but a couple of replies thought I was full of it. And there were the de rigueur “stock buybacks mean NOTHING” blog posts and tweets the following day.

So I decided to spend a day and dig into TXN a bit. Maybe I was wrong. Maybe there’s more to the story of Texas Instrument’s stellar stock performance over the past 10 years than mortgaging the future OVER and OVER and OVER again for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.


Texas Instruments is, in fact, a poster child for financialization.

There’s nothing illegal or incompetent or even unethical about it. It’s the smart play! Hats off to the TXN management team! I’d have done exactly the same thing in their shoes!

But yeah, this is, in fact, why the world is burning.

I’m going to focus on a 5-year stretch of TXN’s financials, 2014 through 2018. This is where the truly meteoric stock price appreciation took place over the past 10 years, even with the Q4 2018 market swoon, and comparing full year financials makes for a more apples-to-apples comparison.

But before I get into the numbers, let me tell you the story.

The Texas Instruments story is free cash flow and earnings growth that management “returns to shareholders”. EPS on a fully diluted weighted basis has more than doubled from 2014 through 2018, net income available to shareholders on a GAAP basis has doubled, and cash from operations has almost doubled.

The Texas Instruments story is NOT a story. This is NOT a non-GAAP-this or pro forma-that story. There are real earnings and real operations and straightforward financial statements here.

What makes this a story of financialization is the WHY of the very real free cash flows and earnings growth. What makes this a story of financialization is the HOW of the allocation of those cash flows and earnings.

The WHY is pretty simple.

TXN management has cut their cost structure to the everlovin’ bone.

At the end of 2013, TXN cost of goods sold (COGS) was 48% of revenues. By the end of 2018, COGS was 35%. Gross margins went from 52% to 65%!

At the end of 2013, TXN sales, general and administrative costs (SG&A) was 15.2% of revenues. By the end of 2018, SG&A was 10.7%.

At the end of 2013, TXN research and development expenses (R&D) was 12.5% of revenues. By the end of 2018, R&D was 9.9%.

And while it’s not part of the fixed cost structure per se, Texas Instruments was a keen beneficiary of the Tax Cuts and Jobs Act of 2017, seeing their 2017 tax rate of 16% cut to 7% in 2018, reducing their tax bill by $1.2 billion.

Good thing they’re using that tax cut windfall to hire new workers and invest in new facilities!

Hahahahaha! I’m just joshing with you. Of course that’s not what the tax cut windfall went for.

But hang on … let me finish with the WHY of cash flow growth.

See, there was zero revenue growth at TXN from 2014 to 2015 ($13 billion flat in both years), and tiny growth from 2015 to 2016 (less than 3%). But there was healthy revenue growth from 2016 to 2017 (11% or so) and so-so growth from 2017 to 2018 (6% or so). And when you’re cutting costs like TXN was doing over a multiyear period, even mediocre top-line increases can lead to dramatic profit increases.

How dramatic? Cash from operations was $3.9 billion in 2014, but by 2018 was $7.2 billion. Nice!

Over this 5-year period, Texas Instruments generated $25.5 billion in cash from operations and $32.5 billion in earnings before interest, taxes, depreciation and amortization (EBITDA).

From a cash perspective, of course you’ve got to pay taxes out of all that (again, thank you for the extra $1.2 billion, GOP!), which comes to about $7 billion over the five years, but you can defer some of this to minimize the cash hit. And you’ve got to pay interest on the $5.1 billion in debt you’ve taken out, which comes to … oh yeah, basically nothing … thank you, Fed! And you’ve got to account for depreciation and amortization, which comes to $5.2 billion over the five years … but this is a non-cash expense, so it’s not going to dig into that cash hoard. And you’ve got some cash puts and takes from working capital and inventory and what not, but nothing dramatic. And you’ve got $1.3 billion in stock-based comp, but again that’s a non-cash expense … whew! And – oh, here’s an interesting cash windfall – TXN raised about $2.5 billion by selling stock over these five years. Wait, what? Selling stock, not buying stock? Selling stock to whom? Hold that thought …

Put it all together and I figure the company generated about $25 billion in truly free cash flow over this 5-year span (everyone calculates FCF a bit differently, so don’t @ me on this … I’m in the right ballpark). What are you going to spend this treasure chest on, Texas Instruments? HOW are you going to allocate this capital?

Well, surely you’re going to spend a healthy amount on capex, right? I mean, you took a $5.2 billion depreciation and amortization charge over this time span, and we all know that semiconductor manufacturers need to stay on that bleeding edge of technological innovation, right? Because we all know that technology and the productivity it brings are how we grow earnings, right?

Nope. Texas Instruments spent $3.3 billion on fixed assets from 2014 through 2018, one-third of that total in 2018. Some significant proportion of that was maintenance capex as opposed to growth capex. Significant like in approaching 100% (my guess). LOL. And don’t call me Shirley.

Well, if you didn’t spend your money on property, plant and equipment, then surely you spent a healthy sum in M&A, right?

Nope. $1.6 billion over five years. Tuck-in stuff. Again LOL. Again Shirley.

I guess you were paying down debt, then. Deleveraging up a storm, right?

Nope. Paid down debt by $500 million per year in 2014, 2015 and 2016, but got smart and increased debt by $500 million in 2017 and $1 billion in 2018. Wait, what? MOAR debt, on top of all that cash generation? Huh. Weird.

So it’s dividends, right? This is where all the cash went, yes?

Yes, now we’re getting there. $9.1 billion in dividends over five years. A healthy direct return of capital to shareholders. But it’s just a warm-up to the main event.

Texas Instruments spent $15.4 billion buying back its stock from 2014 through 2018.

Between stock buybacks and dividends, that’s $24.5 billion in cash “returned to shareholders”, essentially 100% of the free cash flow generated by the company over the past FIVE YEARS.

Now here’s the kicker.

What sort of share count reduction would you think that this $15.4 billion in buybacks gets you?

I mean, that IS the logic here, that we’re leveraging earnings growth through the share buybacks. I mean, this IS the judgment call that management is making on behalf of shareholders, that investing $15.4 billion in the company’s own stock is the best possible capital allocation that the company can make.

I would have guessed that surely $15.4 billion would retire anywhere from 20-25% of the outstanding shares over this time frame, with the stock price ranging from $40 to $100.

In truth, Texas Instruments retired only 10% of its outstanding diluted shares with its $15.4 billion investment, going from 1.1 billion shares to 990 million shares.

Remember all that stock and all those warrants sold to management with one hand while the other hand buys it back? Remember all that stock-based compensation?

Again LOL. Again Shirley.

But wait, there’s more.

We can measure the windfall compensation paid to TXN management here.

From 2014 through 2018, Texas Instruments bought back 228.6 million shares for $15.4 billion. That works out to an average purchase price of $67.37.

Over that same time span, Texas Instruments sold 90.8 million shares to management and board members as they exercised options and restricted stock grants, for a total of $2.5 billion. That works out to an average sale price of $27.51.

The difference in average purchase price and average sale price, multiplied by the number of shares so affected, is the direct monetary benefit for management. This is true whether or not management sells their new shares into the buyback or holds them. That amount works out to be $3.6 billion.

In other words, 40% of TXN’s stock buybacks over this five year period were used to sterilize stock issuance to senior management and the board of directors.

In other words, senior management and the board of directors received $3.6 BILLION in direct value from these stock buybacks.

But wait, there’s more …

As of December 31, 2018 there were still 40 million shares outstanding in the form of options and restricted stock grants to management and directors, at an average weighted exercise price of $55.

At today’s stock price, that means there is an additional $2.6 BILLION in stock-based compensation already awarded to TXN’s executives and directors.

Well golly, Ben, these surely must have been amazing managers and directors to warrant that sort of stock-based compensation in addition to their cash compensation!

Again LOL. Again … oh, you get the point.

That’s TXN stock performance in white and SOXX performance in gold over the 5-year period 2014 – 2018.

SOXX is an ETF that tracks the Philly Semiconductor Index. Texas Instruments is the fifth largest position in that ETF and that underlying index, with a 7.1% weight.

Oh yeah, one more thing … the expense ratio of the SOXX ETF is 47 basis points.

For the past five years, Texas Instruments has been nothing more than a tracking stock for a passive semiconductor index.

For this privilege, shareholders have rewarded management and directors with $6.2 BILLION in stock, plus a couple of BILLION in cash compensation.

I’d say LOL, but I’m not laughing anymore. Are you?

It’s never been a better time in the history of the world to be a senior manager of a publicly traded company.

Under the narrative cover of “returning capital to shareholders” and the common knowledge of “aligned interests” and the cash windfall of “job-creating tax cuts” and the equity valuations driven by “extraordinary monetary policy” … management teams like that at Texas Instruments have sucked the FUTURE of their company dry for the NOW of their personal enrichment.

What’s the real story of Texas Instruments?

It’s the real story of pretty much every public company over the past decade.

Public companies are managed today to mortgage the future OVER and OVER and OVER again, for the primary benefit of management shareholders and the secondary benefit of non-management shareholders.

And their main tool for this is the stock buyback.

It’s a crying shame, because here’s the thing … the total return on owning TXN is, in fact, 15% higher than the SOXX ETF over this five year span 2014 – 2018.

Not because of the stock buybacks.

Because of the dividend.

Do you want to run your company for cash generation? Do you want to return that cash to shareholders? GREAT!

Use a special dividend, not buybacks.

There, fixed it for you.

Do stock buybacks lift the stock market “artificially”? I guess. Kinda sorta. On the margins. Then again, markets happen on the margins.


The right question is not whether or not stock buybacks prop up the overall market.

The right question is not the macro.

The right question is the micro.

The right question is whether or not stock buybacks are the best use of capital if you take a steward’s perspective rather than a manager’s perspective.

Which no one does today.

Not even the boards of these companies. Especially not the boards of these companies.

You know, everyone is all in a tizzy about Softbank paying Adam Neumann $1.7 billion just to go away.

My unpopular opinion: the Adam Neumann story is repeated in a non-infuriating and non-obvious way every day in every S&P 500 company. And it’s been going on for a DECADE.

Dimon, Iger, Cook, Nadella, Pichai, Fink … they’re not founders like Gates or Bezos. They’re not investors like Buffett or Dalio. They’re management. And now they’re billionaires. And all their captains and lesser brethren are centimillionaires. And all their lieutenants and subalterns are decamillionaires.

And everyone is perfectly fine with this. No one even notices that this is happening or that it’s different or that it’s a sea change in how we organize wealth in our society. It’s not good or bad or deserved or undeserved. It just IS. This is our Zeitgeist.

This Is Water

One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

It’s the triumph of the manager over the steward. The triumph of the manager over the entrepreneur. The triumph of the manager over the founder. The triumph of the manager over ALL.

Welcome to the Long Now.

PDF Download (Paid Subscription Required): Yeah, It’s Still Water

To learn more about Epsilon Theory and be notified when we release new content sign up here. You’ll receive an email every week and your information will never be shared with anyone else.


  1. On first read, I don’t disagree with anything here. However, I hope you are being sarcastic when you say you would have done the same thing in their shoes. I do consider that behavior unethical when the actors (management and a board that’s aware or MIA) know damn well it’s a misallocation of capital/transfer of wealth.

  2. This is a great article. I could feel this happening for some time based on the news and internal announcements at work. This put it perfectly into words.

    It feels like the pilots (management) are flying the plane straight up. We’re just along for the ride. Eventually, the plane is gonna stall.

  3. The whole management-serving edifice here is a consequence of well-meaning attempts to align incentives. Management’s job should be maximizing shareholder value, right? (Setting aside ESG/CSR type discussions for the moment.) So focus management compensation on stock performance metrics and pay them in stock. Then management will look out for the shareholder, right? Sure. THAT IS HAPPENING. As long as the shareholder’s desired investing time horizons align with the manager’s career timeline horizon! In that case, it is 100% ethical for management to get paid in stock and then game the stock price. They’re gaming it for shareholders’ benefit, too.

    The financialization and self-rewarding behavior here is public and transparent, and many shareholders surely see it and choose to own the company’s stock anyway. It’s only really unfair to shareholders that want to own the company longer than the manager intends to be employed there, and aren’t as sophisticated as Ben…

    To the extent everyone involved is acting in accordance with the incentive structure and ethical guidelines they’re given by whoever is one step up the chain, it’s not necessarily unethical, just not well-aligned with society’s broader interests. The bigger issue to my mind is the collection of structural issues with our economy/society/laws that make financialization more rewarding than real business growth. Growth compounds exponentially so it should be preferable to financialization over even the 5-10 year timeframes we would expect managers to worry about.

  4. I think Ben is right in saying that he would do the same thing. This is a system and you don’t get to join the system unless you are going to play the game their way. After all, we’re not communists. If you could take a top position with a publicly traded company and set your family up for at least the next 3 generations without breaking any laws, how could you pass up that opportunity? Every C Suite executive has spent their life preparing for that exact position or higher. It’s why they fought to get into the elite university and put in the hours at the big accounting or consulting firm and did the stint overseas when it meant time away from the kids. It’s why they bought the ticket and made sure to get it stamped at every destination. It’s like Sally in the Peanuts Christmas Special. I just want what’s mine. I deserve everything that I got because America is a Meritocracy. If you were better than me, you would have this. It’s another example of tragedy of the commons, the benefits accrue to the few, but the costs and consequences flow to all. How can this be unethical when everyone is doing it, the “market” is rewarding us, and if I didn’t do it, the board would fire me and bring in someone that would. Besides, if I don’t do this look at the 100 people around me that would miss out. They deserve this too.

  5. The plane has already stalled. If you are in coach or economy, you are not gaining any altitude. If you are in Business, First Class, or the Cockpit, you still feel like you are rising, but really, you’re just being pulled into that black hole. It’s just a matter of time before the gravity well and time dilation catch up with you. It’s fun while it lasts, but the consequences are murder.

  6. Avatar for bhunt bhunt says:

    In the words of a great country song … falling feels like flying / for a little while.

  7. Avatar for rwgood rwgood says:

    All true and yet, suppose management had used more of the ~25bn to invest in new PPE, R&D etc. They’re still a mature, cyclical business with some far more innovative competitors who probably would’ve still eaten their lunch. Most of the shares are held by giant institutional investors who know what’s going on. From a policy standpoint it seems to me that while you’re right about the managerial class its better to make policy that promotes competition and creative destruction than to penalize them for buybacks.

  8. Avatar for bhunt bhunt says:

    If you want to run off the company for cash (perfectly reasonable IMO), then:

    1. distribute cash via dividend, not buyback
    2. replace gold-plated mgmt team with trained monkeys.
  9. Avatar for jlmh jlmh says:

    Amazing. Somebody’s noticed what an utter swindle stocks buybacks are.

  10. This article reminds me of the saying. “It’s never as bad as it seems, but always worse than it appears”

  11. Avatar for jlmh jlmh says:

    There is no problem with a reasonable option plan.
    There is a problem when buybacks are allowed so create an incentive to sell the share rather than hold it.
    Shortlist of reasons buybacks should be banned.

    • It’s a price support scheme for the benefit of sellers, people who do not want to be investors, paid for by remaining shareholders.
    • The company is competing with legitimate investors to buy shares. So it increases their cost and discourages them.
    • Buybacks steal cashflow from shareholders, so change the nature of the share. It becomes a zero coupon bond. It is no more a tool to get a return from a company’s growing success, but a non cashflowing instrument that relies on a greater fool being around to buy the share for more than originally paid.
      In other words, how do you eat an unrealised capital gain?
      Or, in yet other words: it is difficult enough to find a well managed company, but the only way to benefit from an investment in it is to get rid of the investment?
      All of this is completely obvious, but when arguing against a trillion dollar a year business, the obvious tends to vanish.
  12. Well now I have to vote for Liz Warren so she can clean this mess up.

  13. My father had all these funny stories he would tell me , kind of like Aesop’s fables ………one of which is the monkey vs the 2 cats….apologies if anyone has read or heard this story before……

    Two cats were fighting over a big lump of cheese……
    A monkey chances along and inquires what the fight is over …
    “We cant decide how to share this piece of cheese’…yell the cats…
    The monkey offers himself as the arbiter……

    He promptly takes a bite of the lump of cheese in the middle……and then surveys his handiwork critically….there are two pieces now, but one piece is larger than the other .
    So he takes a bite out of the bigger piece
    Now the other piece is larger ……
    “this isn’t fair” says the monkey
    and he continues to bite away, attempting to equalize the two halves, till only a small chunk is left….

    He looks at the cats, and says “ settling your dispute is hard work……all that’s left is this piece , which rightfully should be my commission for all this” ……so saying, he gulps that down as well, leaves to go on his merry way, and the 2 cats stare at each other……

  14. The book “The Outsiders” (one of uncle Warren’s favs) is basically a celebration of shrewd M&A and timely stock buybacks. Good stewardship. Somehow it never fails that the market will take a good idea and over do it to the point of destroying value. We are at the “career risk” point of the buyback trend. Any manager who resists doing stock buybacks that can enrich the board and help the company meet/exceed earnings expectations will be fired and replaced with a manager that will buyback stock.

  15. Avatar for rguinn rguinn says:


  16. Avatar for JohnE1 JohnE1 says:

    I suppose the question in all of this is, “How does one play the game ethically without harming one’s clients?”

  17. Avatar for bhunt bhunt says:

    I think that’s EXACTLY what you have to talk with your clients about, so that you’re on the same page about how to make your way in this fallen world without becoming a pauper or a rhino in the process. As a wise dungeon master once told me, “Being lawful good doesn’t mean being lawful stupid!”

    Full-hearted people can disagree on what the proper course of action might be. But what’s crucial, I think, is that you and your clients DO agree on that course of action.

  18. Avatar for JohnE1 JohnE1 says:

    Thank you Ben.

    I’m not sure it was implicit in the conversation and wanted to clarify the action behind the comments with my question.

    Your response fits well with how we try to do business. We look for clients who are in alignment with us, willing to follow our professional advice and capable of implementing it.

    I get it about being lawful versus lawful stupid. A teacher once explained that there is a balance between being selfish and altruistic (for our profession, I think that is the balance between doing everything to be rich - different than wealthy or the pauper). I’m a capitalist at heart and want to be compensated for the value we bring to clients (there is a conversation of how much is enough). So far, the Law of Attraction seems to hold true. We attract like minded people to the table.

  19. Avatar for ianfvr ianfvr says:

    Remember tax inversions?! How did no one get laughed off the “stage” for doing those. Until they just stopped and quietly went off into the night. Tax inversions were my macro moment of truth that capitalism was very sick. It’s a little nuts, I mean it seems to me that stock buybacks, tax inversions, even M&A take minimal skill and brainpower and have very low risk. They are Basic arithmetic level actions. Yet they are well paid. On the other hand, I guess I think it takes skill and some balls to chase organic revenue growth opportunities and manage their volatility and inevitable mishaps and challenges along the way. Seems to me that you’d get fired for that kind of variability in performance. I guess Pay is skill-level agnostic in public Corp America and maybe inversely related. Maybe the less skill the better so you don’t overthink it and blow the bottom line trying to actually grow the business.

  20. Ben writes: “Do stock buybacks lift the stock market ‘artificially’? I guess. Kinda sorta. On the margins. Then again, markets happen on the margins. IT’S THE WRONG QUESTION.” No argument from me that the question the article answers–whether buybacks are the best use of capital from a steward’s perspective–is the more important question.

    But can someone explain what you think is meant here by “on the margins”? Proportionately speaking, buybacks have basically been the ultimate backstop bid, haven’t they? And to the extent that the answer to the more important question is “no”, does that perhaps help define what we mean when we talk about lifting the stock market “artificially”?

  21. But, but, but…doesn’t Everybody know that Everybody knows that this [email protected] is going on? People just keep on piling into ETF’s that mirror the Dow or S&P 500 rewarding the 15% of zombies companies all for a mere 25 basis points? And under-perform by 2%…

  22. If TXN is the poster child of financialization, where are the owners? Who should be voting against all this bullshit? Where’s the corporate raider coming in to unlock shareholder value.

    Here’s a quick google search.

    Mutual fund holders 51.33%
    Other institutional 37.52%
    Individual stakeholders 0.55%

    The finance industry is having it’s own “god is dead and we have killed him” moment.

    Many speculate what the end game of “passive” investing looks like.

    This is a preview.

    But that’s what everyone in finance does. Don’t look at individual investments, build a portfolio. Hurray indexing. Hurray diversification. Hurray diversified portfolio across asset classes because you can’t make alpha without private information.

    Are you investing in a way that supports more of this shit? Then going to your favorite forum “let’s ban buybacks”.

    open eyes
    clear hearts

    Don’t buy TXN stock(directly or indirectly).

    Question for Ben: Is there any TXN under your management?

  23. Yep. Stock buybacks were against SEC rules up until 1982. Maybe after the next market crash the issue will be revisited. Right now, all those management billionaires and their lobbyists in Washington are making sure nobody gets any wild ideas!

  24. Been a free member for a while but recently joined to be able to dig into the archive. Articles like this are worth the price of admission. Thank you guys.

Continue the discussion at the Epsilon Theory Forum


The Latest From Epsilon Theory


This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.

Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.