Monsanto, a company best noted for genetically modified
seed, has made quite a flourish from engineering its balance sheet too.
The world's biggest seed group has been pressed by
shareholders to stop running at a net cash position, and run with borrowings,
like most of its peers.
It is not difficult to see why.
Introducing a net debt target of 1.5 times earnings before
interest, tax, depreciation and amortisation (ebitda) has put shareholders in line for quite a windfall.
Cash to spend
To get a measure of it, consider that Monsanto ran in its
last financial year with a net cash positioning equivalent to 0.4 times ebitda.
Adjusting to its new target means the release of some $10bn,
assuming the ebitda of $5.3bn next year that analysts have factored in.
And that's before the net cash flows of some $3bn a year that
the company is throwing off.
The new share buyback of $10bn that these funds are
supporting should win it quite a few friends.
Of course, there is the risk their loyalty may wane as the buyback
pot - to be spent over the next two years - runs dry.
But Monsanto has helped give them an incentive to hang on by
spending funds on buying shares, rather than splashing out on, say, a raised
The group also on Wednesday revealed a target to double, at
least, its profits by 2019 - a feat not nearly so tricky when earnings are
measured per share, and Monsanto is buying its stock by the hatful.
At today's stock price, the best in six years, the company would
be able to afford more than 87m of its shares with its buyback fund, topped up
with $1.1bn left over from the last programme.
Repurchasing that amount of stock would be enough to raise
earnings per share by 20%, before factoring in any growth in profitability.
Better than Syngenta
And all this while making the company more tax efficient
A major benefit of debt is that, much to the chagrin of many
policymakers, interest payments can be put against tax, unlike dividends.
That looks a much better way of improving Monsanto's tax position
than moving to Switzerland, an idea the group was reported on Tuesday to have looked
at, through a takeover of Syngenta, one of its closest rivals.
While Syngenta still says it is in the market for acquisitions,
for now it deserves applause for choosing to send a stack of cash back to shareholders
rather than splash out on a deal which, however big the tax perks, would have seen
many benefits from costs savings disappear through a tortured anti-trust