Edge and Odds

The enemy of knowledge is not ignorance, it’s the illusion of knowledge (Stephen Hawking)

It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so (Mark Twain)

Edge and Odds

Invest with smart knowledge and objective odds

Month: August 2020

SPLITS ON STOCK SPLITS

August 3, 2020

The WSJ on Aug. 1, 2020 seeks to educate us all on the bullish impact of stock splits:

Stock Splits Pay Off—on the Rare Occasions They Occur

Stocks in the S&P 500 tend to rise 5% in the year following share splits, including 2.5% immediately following the announcement, according to research from Nasdaq Inc. on splits between 2012 and 2018.

“Splits make stocks look better” to everyday investors who would otherwise be put off by a stock’s high sticker price, said Phil Mackintosh, Nasdaq’s chief economist. “And the premium they gather seems to be long-lasting for companies. Investors keep coming into the stock even 12 months later.” (…)

[Apple] rose 10% to $425.04 on Friday, extending its gain so far this year to 45% after the iPhone maker also reported stronger-than-expected earnings on robust sales of apps and its work-from-home devices. The company added about $172 billion in market value, a one-session gain that tops the size of Oracle Corp., Chevron Corp. and McDonald’s Corp.

While the split won’t affect Apple’s valuation, which swelled to $1.817 trillion on Friday, it has implications for investors, as well as for two of the stock indexes in which Apple resides: the Dow Jones Industrial Average and the S&P 500 index.

After the split, Apple’s influence on the Dow will shift from being the most consequential to the middle of the pack. That is because the Dow is price- weighted, meaning the higher the share price, the bigger the influence that stock has over the blue-chip index’s daily price swings.

Had Apple split its stock at the end of last year, the Dow would be off about 10% in 2020, compared with the 7.4% decline it currently registers, according to Dow Jones Market Data. Besides resulting in a smaller role in the Dow’s moves, the change would likely widen the performance gap between the 30-stock index and the broader S&P 500, which is up 1.2% this year and weighted by market value. The divergence between the indexes in 2020 is already at the widest mark in decades. (…)

About 41% of the stocks in the S&P 500 currently trade above $100, the level that once spurred executives to consider a split. Just three companies, including Apple, have unveiled plans for share splits this year. That is down from 102 companies in 1997 and seven in 2016, according to Charles Schwab Corp. (…)

Investors previously found better pricing deals on trades if they were willing to buy round lots of 100 shares rather than on odd lots of stock that carried steeper commissions. (…)

Ramon Laguarta, the chief executive of PepsiCo Inc. dismissed in May the possibility of a stock split for the company, whose shares trade at $137.66. He blamed administrative costs associated with such a move as a deterrent, adding that the expense outweighs the benefits in terms of potential value creation for the company. One academic paper pegged the administrative cost of a stock split as high as $800,000 for a large company. (WSJ)

Hmmm…Ramon, Apple’s value swelled by $172 billion last Friday, covering expenses 215,000 times…PEP’s market cap is $190B. Even a 5% pop, per the Nasdaq “research”, equals nearly $10B. What if you or your CEO had options expiring soon?

Pointing up The empirical study likely to get the most media exposure on stock splits is the 1996 study by David Ikenberry of Rice University who analysed 1,275 companies whose stock split 2-for-1 between 1975 and 1990.

Overall, the evidence suggests that although splits appear to be directly motivated by a desire to maintain a trading range, it also appears that the decision to initiate a stock split is made conditional on favorable expectations regarding future performance. Thus indirectly, splits are informative…Split firms experience an additional permanent excess gain of 7.94% in the first year after the declaration. After three years, compounded excess performance exceeds 12.14%.

In August 2003 Mr. Ikenberry updated the study, adding the period 1990 to 1997. Results were essentially the same. Shares of split stocks on average outperformed the market by 8% the following year and 12% over the next three years.

Truly amazing! Two studies, two periods, exactly similar results.

Imagine what Jeff Bezos left on the market table, had he been splitting AMZN 2 for 1 every time the stock hit $100. Six splits over the last 10 years and 8% excess annual returns each shot: AMZN’s current $1.6T market cap would be $2.5T. That’s a lot of money Bezos failed to deliver! AMZN’s price/cashflow would be 60, not its current 38.

One could think one now has enough info backed by solid empirical analysis to conclude that stock splits are generally good for stock prices and move on to improve one’s golf game, ski in the Alps and live the high life, simply awaiting future split announcements to build one’s portfolio using this very simple factor and easily beat equity markets year after year.

After all, with 85 stock splits per year (1975-90 annual average), it should be easy to build a well diversified portfolio and handily beat the market.

Unfortunately, Jinho Byun (Korea Securities Research Institute) and Michael S. Roseff (University of Buffalo) published in 2003 an analysis of all previous analysis while also performing their own calculations of post-split performances of 12,747 stock splits between 1927 and 1996. Their conclusion with my emphasis:

Between 1927 and 1996, neither method applied to splits 25 percent or larger finds performance significantly different from zero. Over selected subperiods, subsamples of 2–1 splits restricted by book‐to‐market availability requirements display positive abnormal returns using some methods. However, these samples show small or negligible abnormal returns using the calendar‐time method. Overall, the stock split evidence against market efficiency is neither pervasive [“spreading widely”] nor compelling [“inspiring conviction”].

And their explanations (my emphasis):

Since splits are widely reported and noted, a stock split anomaly would be a particularly flagrant violation of market efficiency. We ask whether returns after stock splits actually do allow investors to capture abnormal returns. Our paper suggests that the stock split does not provide evidence against efficient markets when the entire record is examined.

(…) there is a strong contradiction between earlier and later empirical findings. Fama et al. (1969) (FFJR) find no abnormal performance subsequent to stock splits, whereas both Ikenberry, Rankine, and Stice (1996) (IRS) and Desai and Jain (1997) (DJ) report abnormal returns of seven to eight percent in
the 12 months following stock splits. (…)

Since earlier and later stock split studies employ very different methods, we alleviate the incomparability by uniformly applying a broad set of up-to-date abnormal return and statistical testing procedures to all the subperiods. (…)

Yet another difficulty in assessing long-term performance arises from sampling variation. Mitchell and Stafford (1998) find that “comparison of our estimates to those of other researchers reveals that slight modifications to either the sample or the methodology can produce dramatically different results.”

(…) particular methodological choices do have a marked influence on outcomes. The use by IRS of 2-1 splits together with book-to-market matching gives a restricted sample of 1,802 observations. However, we find 6,918 splits of size greater than 25 percent between 1975 and 1990. We can evaluate all of these if we use size matching only, since the latter does not require that book values be available on COMPUSTAT. For the 6,918 splits, the control and split firms differ by merely 0.55 percent, an inconsequential and insignificant difference.

More recently (2012), Alon Kalay (Columbia U.) and Mathias Kronlund (U. of Illinois) published “The Market Reaction to Stock Split Announcements: Earnings Information After All” analysing 2,097 stock splits between 1988 to 2007. Having read all 49 pages, I can save you time saying that this research is mainly concerned with relative earnings and relative earnings revisions, not long-term price performance (my emphasis).

While many theories have sought to explain the presence of abnormal returns around stock splits announcements, our evidence reaffirms the earnings information based explanation discussed in the accounting literature by Asquith et al. [1989].

We find that analysts increase their earnings estimates around stock split announcements, and that the revision is greater for firms with more opaque information environments [measured by fewer analysts and lower
market capitalization]. Furthermore, the earnings forecast revisions for splitting firms is significantly higher than that for matched firms, indicating that the observed increase in earnings estimates does not result from analysts sluggishly revising their forecasts in response to the splitting firms’ past performance. (…)

Finally, we find that the future earnings growth of the splitting firms is higher than that of matched firms with similar past earnings growth, for up to two years following the split. While both the splitting firms and the matched firms experience lower earnings growth in future periods after the split compared to their own past earnings growth, the future earnings growth of the splitting firms is nevertheless higher than that of the matched firms. This result implies that the earnings growth experienced by the splitting firms before the split is less transitory in nature than the pre-split expectations (as proxied by the performance of ex-ante comparable firms). This result helps explain why analysts revise their expectations of future earnings following a split announcement and increase their earnings estimates. This positive change in expectations is likely to be a primary reason why the market views a stock split announcement as favorable news. (…)

In addition to our results which reaffirm the information hypothesis, we find
that in years when the low-price premium is higher, indicating periods where investor preferences for low-priced stocks increased [smaller caps?], split announcement returns are not higher on average (and significantly negative in some specifications).

Yes, it comes down to earnings and earnings visibility.

I bet stock splits will become more popular.

THE DAILY EDGE: 3 AUGUST 2020

0_All Key Metrics (13)

1R_Reg Positive

2R_Reg Tests & % Pos

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(NBF)

A July 23-26 Morning Consult survey found that 95 percent of adults have worn a face mask in the past month in public spaces, up from half of adults in an April 7-9 poll. Read More.

PANDENOMICS
GOP, Democrats Remain at Odds Over $600 Jobless Benefit Democrats and Republicans remained at loggerheads in weekend negotiations on a new coronavirus economic relief package, including aid to replace the federal $600-a-week boost to unemployment benefits that expired Friday.

While politicians debate, Goldman Sachs’ employment tracker suggests that employment has hooked down in July and that the U.S is still missing about 14 million workers (9%) with many others employed but working fewer hours.

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Google Mobility tracer confirms the recent slowdown and shows how activity in the U.S. denser areas remain 20-30% below February’s levels (GS chart).

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Consumers Shun Credit-Card Debt Rather than rising as expected when unemployment soared amid coronavirus lockdowns, credit-card debt in the U.S. and other advanced economies has dropped

Fewer people are late on their credit-card payments. Consumer demand for new borrowing—through credit cards, personal loans and even pawnshops—is down sharply.

The main reason, according to economists and financial executives, is government stimulus programs launched in the U.S. and other advanced economies that have worked unexpectedly well. The flood of money, along with debt-relief measures such as deferred-mortgage and student-loan payments, has stabilized the finances of many households and even left some in better shape than before the pandemic—at least for now. (…)

“They’re using the injection of government stimulus, quite frankly, to put themselves in a better position.” (…)

In the U.S., total outstanding credit-card debt fell by 11%, or $100 billion, between February and the end of June, according to Equifax. April was the largest monthly drop in revolving credit on record, while May was the second-largest, according to Federal Reserve data. Personal-loan originations were down by a third in mid-May compared with the beginning of March, according to Equifax.

Since February, credit-card debt is down 11% in Canada, 14% in the U.K. and 17% in Australia. In the eurozone, credit-card debt and other forms of revolving credit for households fell 5% between February and June. (…)

Large credit-card issuers such as Capital One Financial Corp. and Synchrony Financial said many of their customers who entered deferment programs in the spring had exited by June. (…)

But credit-card debt has continued to fall even as lockdowns were relaxed in May and June and retail spending rebounded. (…)

The combination of state and federal unemployment benefits has meant that around two-thirds of U.S. workers who were laid off or furloughed are eligible to receive more in unemployment than they were earning on the job, according to a study by economists at the University of Chicago. The U.S. stimulus legislation also allowed people to defer payments on their federally backed mortgages for up to a year and most federal student loans through September. Those measures have given many Americans who were living for years with large credit-card balances extra funds to pay them down. (…)

“It’s a good time to be debt-free,” Ms. McClean said, “because soon I won’t have a career.”

It’s called a higher propensity to save. From The Day After…

Consumers are the key to re-starting world demand. We are in uncharted territory but we can safely say that

  • previous employment levels are unlikely to be reached for years as many businesses will shrink/disappear and companies will seek to reduce costs;
  • the use of robots will accelerate;
  • fear and safe behavior will linger;
  • the savings rate will most likely rise as consumers build bigger financial shock absorbers;
  • pension angst will increase with ever rising pension deficits.
  • Will luxury, ostentatious wealth be out?
U.S. Personal Spending Strengthens as Income Declines in June

Personal consumption expenditures increased 5.6% in June (-4.8% y/y) following an 8.5% May rise, revised from 8.2%. Spending had fallen in 12.9% in April, revised from -12.6%. In constant dollars, total spending rose 5.2% last month (-5.5% y/y). Real durable goods purchases increased 8.8% (11.7% y/y) during June after strengthening 28.1% in May. Spending on motor vehicles improved 7.5% (8.1% y/y) and has risen 7.2% since December. Home furniture & appliance buying jumped 8.0% (9.9% y/y) after surging 22.7% in May, while recreational goods & vehicles outlays increased 6.7% (26.0% y/y) to another record high. Real nondurable goods buying increased 4.1% (2.7% y/y) after improving 7.9% in May.

Real spending on services improved 5.0% (-10.5% y/y) after a 5.6% gain. Spending had collapsed in the prior two months. The increase was led by a 37.6% strengthening in sales of recreation services following a 7.7% rise. Nevertheless, spending here is down 43.1% year-to-date. (…)

Personal income declined 1.1% in June after falling 4.4% in May, revised from -4.2%. A 0.9% shortfall had been expected. The decline reflected a 9.0% falloff (+59.0% y/y) in government transfer payments as economic impact payments slid 93.4% after declining 76.6% in May. Wages & salaries improved 2.2% (-2.4% y/y) after rising 2.6% in May as employment bounced back. (…)

Disposable personal income declined 1.4% (+8.9% y/y) last month after falling 5.1% in May. Adjusted for price inflation, take-home pay decreased 1.8% (+8.1% y/y) after falling 5.2% in May.

Last month’s strength in spending relative to income lowered the personal savings rate to 19.0% from 24.2% in May. The level of personal saving rose 192.6% y/y.

The PCE chain price index increased 0.4% last month (0.8% y/y) after edging 0.1% higher in May. The price index excluding food & energy rose 0.2% (0.9% y/y). Energy prices increased 4.6% (-12.8% y/y) after five months of decline. Food prices rose 0.5% (5.2% y/y), the weakest increase in the last four months.

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High Frequency Indicators for the Economy

CalculatedRisk has a bunch of indicators showing the “V” is not quite perfect just yet.

One-Third of New York’s Small Businesses May Be Gone Forever Small-business owners said they have exhausted federal and local assistance and see no end in sight after months of sharp revenue drops. Now, many are closing their shops and restaurants for good.

‘New Normal’ Emerges for Companies in Pandemic Business executives say they are getting a better grip on what a world transformed by the coronavirus looks like, giving them more confidence to lay out new strategies.

(…) [McDonald’s] moved to a limited menu in the quarter, helping to simplify operations. (…) some renters don’t want to live in various dense urban areas right now. (…) Snack maker Mondelez International Inc. is removing a quarter of product types it produces to better focus on its most important brands. (…)

MANUFACTURING PMIs

I provide the links to each country’s PMI pdf, hereby focusing on the most important data: demand/new orders.

U.S. manufacturing operating conditions improve for the first time since February
  • Output rose only modestly in July, albeit the first expansion in production since February. Where an increase was reported, firms linked this to the resumption of operations at manufacturers and their clients. Some also noted that demand also began to pick up.
  • Reflecting the reopening of many customers, new orders increased for the first time since February in July. The rate of growth was modest, despite signalling a stark contrast to the marked decline seen in April. Although total sales expanded, new export orders fell fractionally as foreign client demand struggled to gain momentum amid the gradual reopening of global economies following the COVID-19 pandemic.
  • goods producers signalled a fractional contraction in employment in July, as firms noted redundancies due to subdued new order inflows. That said, the rate of job shedding was the softest in the current five-month sequence of decline as the reduction in backlogs of work eased further from April’s low.
  • firms continued to reduce their input buying at the start of the third quarter.

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Eurozone manufacturing economy returns to growth in July
  • growth was widespread, with all market groups registering PMI readings above 50.0 during July. Consumer goods was the best-performing, registering is strongest expansion for over a year-and-a-half.
  • the gain seen for new orders was the first in nearly two years and the strongest since early-2018.
  • Latest data pointed to improved demand from both domestic and international markets. New export orders rose for the first time since September 2018, although growth was modest and notably lagged that of overall new work.
  • Backlogs of work declined during July for a twenty-third successive month, albeit only slightly, whilst firms again made cuts to their workforce numbers. Latest data marked the fifteenth successive month that employment has fallen, with the degree of job shedding again considerable and historically sharp.
  • Manufacturers continued to signal a preference for utilising existing inventories in production during July, with latest data showing the sharpest cut to stocks of purchases for six months. Higher production requirements and ongoing reductions in purchasing activity were the primary factors placing downward pressure on stocks. Latest data showed that the buying of inputs was cut for a twentieth successive month, albeit to a much weaker degree.

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China: Operating conditions improve at quickest rate since January 2011
  • Companies registered the quickest expansions of output and new orders since January 2011 amid reports of firmer customer demand. New business from overseas meanwhile fell at the slowest rate for six months. Increased production led to the strongest rise in purchasing activity since January 2013. However, firms maintained a cautious approach to hiring, with staff numbers falling modestly despite an increase in backlogs of work. Inflationary pressures picked up, with firms reporting steeper increases in both input prices and output charges.
  • many companies citing greater client demand amid a further recovery in market conditions following the COVID-19 outbreak. Moreover, new business expanded at a solid pace that was the steepest since the start of 2011.
  • the gauge for new export orders remained in contraction territory for the seventh consecutive month. Although the pace of the contraction slowed, overseas demand remained a drag on overall demand.
  • Rising new order intakes placed some pressure on capacity, as highlighted by a further increase in outstanding business. The rate of accumulation quickened since June but was modest overall. Although backlogs increased, companies cut their staffing levels again in July, albeit only slightly.
  • Higher operational requirements led manufacturers to increase their buying activity again in July. Furthermore, the rate of expansion was the most marked in seven-and-a-half years. Consequently, stocks of inputs rose for the second month running.

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Japan: Manufacturing production falls at slowest pace since February
  • Goods producers continued to report a severely negative impact on customer demand from the coronavirus disease 2019 (COVID-19) pandemic and worsening global economic conditions.
  • New orders fell to the smallest degree since February, helped by a gradual easing of the downturn in export sales across the manufacturing sector. Nonetheless, survey respondents noted that fragile global economic conditions continued to weigh on order books in July.
  • Subdued demand conditions resulted in another steep fall in purchasing activity and tighter inventory policies among Japanese goods producers. The latest survey indicated lower stocks of finished goods as well as reduced pre-production inventories.

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EARNINGS WATCH

From Refinitiv/IBES:

  • Through Jul. 31, 312 companies in the S&P 500 Index have reported earnings for Q2 2020. Of these companies, 82.1% reported earnings above analyst expectations and 16.7% reported earnings below analyst expectations. In a typical quarter (since 1994), 65% of companies beat estimates and 21% miss estimates. Over the past four quarters, 71% of companies beat the estimates and 22% missed estimates.
  • In aggregate, companies are reporting earnings that are 21.7% above estimates, which compares to a long-term (since 1994) average surprise factor of 3.3% and the average surprise factor over the prior four quarters of 4.3%.
  • Of these companies, 67.9% reported revenue above analyst expectations and 32.1% reported revenue below analyst expectations. In a typical quarter (since 2002), 60% of companies beat estimates and 40% miss estimates. Over the past four quarters, 59% of companies beat the estimates and 41% missed estimates. In aggregate, companies are reporting revenue that are 1.4% above estimates, which compares to a long-term (since 2002) average surprise factor of 1.5% and the average surprise factor over the prior four quarters of 0.7%.
  • The estimated earnings growth rate for the S&P 500 for 20Q2 is -33.8%. If the energy sector is excluded, the growth rate improves to -27.3%. The estimated revenue growth rate for the S&P 500 for 20Q2 is -10.4%. If the energy sector is excluded, the growth  rate improves to -6.1%.
  • The estimated earnings growth rate for the S&P 500 for 20Q3 is -23.1%. If the energy sector is excluded, the growth rate improves to -19.7%.

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Factset tells us that

At this point in time, 32 companies in the index have issued EPS guidance for Q3 2020. Of these 32 companies, 7 have  issued negative EPS guidance and 25 have issued positive EPS guidance. The percentage of companies issuing negative EPS guidance is 22% (7 out of 32), which is below the 5-year average of 69%.

The problem with that is that its mainly companies confident enough that are offering guidance. Normally, at this time, more than 80 companies would have guided forward. In fact, “through July 28, 51 S&P 500 companies had confirmed a previous withdrawal of annual EPS guidance for FY 2020 or 2021 during the Q2 earnings season.”

TECHNICALS WATCH

Lowry’s Research notes, once more, that the Demand side of its Supply-Demand analysis has weakened and has become more selective since the June 8 highs. This is seen in all market caps. It also observes that the “desire to sell continues to wane”. While breadth and momentum still look “healthy”, Lowry’s analysis reveals that increasingly weak Energy and Financial stocks are weighing on equity indices and that an “improvement in the Financial and Energy Sectors will likely go a long way toward  bridging the gap, providing a key Demand boost.”

Hmmm…

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If analysts are right, Energy and Financials earnings are not about to offer much buying incentive:

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Energy P/Sales and P/CF ratios are very low but margins are very depressed…(charts below from Morningstar/CPMS)

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…and need sustained higher oil prices that investors can trust. Calling Putin, calling MBS!

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Financials don’t look so cheap on a P/E and P/Bk basis. The unfavorable yield curve and declining ROEs are not motivating buyers:

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That said, tech stocks are also not in the cheap area, to say the least. P/E and P/S are back to 1999/2000 levels with margins (blue line) expected to decline (blue dot).image

Meanwhile,

the Nasdaq 100 is pretty extended vs its still rising 200dma as Ned Davis Research shows…

…and the S&P 500 13/34–Week EMA Trend remains supportive (CMG Wealth)…

..although the 500 is extended vs its rising 200dma as Ed Yardeni illustrates:

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I am not a fan of comps like that one below from Kessler Investment Advisors. I am only using it now to show that investors can, on occasions, entirely misread a situation.

HSBC warns loan losses could hit $13-billion as profit plunges 65%

(…) The lender warned its capital reserves could deteriorate, its revenues would come under pressure and it faced heightened geopolitical risk as Europe’s biggest bank set out a gloomier than expected outlook for the second half of the year.

HSBC increased its estimate of the total bad debt charges it could take this year to between $8-billion and $13-billion from $7-billion-$11-billion, reflecting worse-than-expected actual losses in the second quarter and expectations of a steeper decline in the economy. (…)

PANDEMONIUM
U.S. to Act on China Software Beyond TikTok, Pompeo Says

The Trump administration will announce measures shortly against “a broad array” of Chinese-owned software deemed to pose national-security risks, U.S. Secretary of State Michael Pompeo said.

The comments suggest a possible widening of U.S. measures beyond TikTok, the popular music-video app owned by ByteDance Ltd., one of China’s biggest tech companies. President Donald Trump told reporters Friday that he plans to ban TikTok from the U.S., but his decision hasn’t been announced. Pompeo signaled he expects a Trump announcement “shortly.” Chinese newspapers slammed a potential ban on TikTok. (…)

Chinese software companies doing business in the U.S. are feeding data directly to Chinese authorities “whether it’s TikTok or WeChat — there are countless more,” Pompeo, on of the Trump administraton’s China hawks, said on Fox News Channel’s “Sunday Morning Futures.”

Trump “will take action in the coming days with respect to a broad array of national-security risks that are presented by software connected to the Chinese Communist Party,” Pompeo said. (…)

The China Daily wrote in an editorial on Sunday that “although the Oval Office claims to oppose authoritarianism, it has a penchant for arbitrarily demonstrating its own authority.”

And an editorial in the Global Times, one of China’s most combative state-run papers, said that “the U.S. claim that TikTok threatens its own national security is purely hypothetical and unwarranted charge — just like the groundless accusation that Huawei gathers intelligence for the Chinese government.”

Microsoft talks to buy TikTok’s U.S. operations spark ire in China A potential shotgun wedding to Microsoft Corp for TikTok’s U.S. operations provoked an outcry on Chinese social media as well as criticism from a prominent Chinese investor in TikTok owner ByteDance.
Microsoft confirms talks to buy TikTok’s U.S. operations, Trump gives TikTok’s Chinese owner 45 days to reach deal As Microsoft seeks to buy TikTok’s U.S. business before Sept. 15, prominent Chinese investors and social media users resist

Chinese artificial intelligence company files $1.4 billion lawsuit against Apple
Eastman Kodak top executive got Trump deal windfall on an ‘understanding’

Last Monday, Eastman Kodak Co. granted its executive chairman options for 1.75 million shares as the result of what a person familiar with the arrangement described as an “understanding” with its board that had previously neither been listed in his employment contract nor made public.

One day later, the administration of President Donald Trump announced a US$765-million financing deal with Eastman Kodak, and in the days that followed the stock soared, making those additional options now held by executive chairman Jim Continenza worth tens of millions.

The decision to grant Mr. Continenza options was never formalized or made into a binding agreement, which is why it was not disclosed previously, according to the person familiar with the arrangement. The options were granted to shield Mr. Continenza’s overall stake in the company from being diluted by a US$100-million convertible bond deal clinched in May, 2019, to help Eastman Kodak stay afloat, according to the person’s account.

While Kodak’s approach is permissible, it is unusual because executives are paid to grow a company’s long-term value and are not usually given extra compensation personally to cover events that may hurt share prices, several experts said.

Kodak disclosed the stock options award to Mr. Continenza in a filing to the U.S. Securities and Exchange Commission, which was previously reported. But the person familiar with the arrangement told Reuters that the transaction occurred because of the understanding with the board.

That arrangement reported by Reuters for the first time sheds new light on Eastman Kodak’s handling of the unexpected windfall for its top executives.

An Eastman Kodak spokeswoman said that Mr. Continenza had no comment. The spokeswoman said the gains reflected by the rise in the share price are only on paper: Mr. Continenza, she said, “is a strong believer in the future of the company, and has never sold a single share of stock.”

Prior to this week’s financing deal, the company warned investors it was at risk of not continuing as a going concern, but it was boosted by the agreement with the Trump administration on Tuesday to supply drug ingredients.

As a result, Mr. Continenza’s gains at the end of this week amounted to about US$83-million following a roughly 10-fold increase in Eastman Kodak’s stock, compared to the approximately US$53-million in gains he would have seen were it not for the additional options, according to a Reuters analysis of company filings.

Roughly 29 per cent of the options Mr. Continenza received on Monday vested immediately, giving him the right to cash them out as soon as possible.

While most corporate boards and their committees have wide latitude in awarding options, three corporate governance experts interviewed by Reuters said the move to mitigate the impact of dilution on Mr. Continenza’s stake in the company without a prior contractual obligation was unusual.

“The compensation committee’s job is not to protect the CEO from every adverse effect on the stock price,” said Sanjai Bhagat, a finance professor at the University of Colorado. “It’s to get the CEO to think about long-term value.”

A fourth expert, Robin Ferracone, chief executive of compensation consultant Farient Advisors, said the company may have offered the prospect of additional options to executives as they worked toward the convertible bond offering — to avoid them being “disincentivized” to seal a deal that would help the firm but potentially water down their holdings. Confused smile

The additional options awarded to Mr. Continenza, a former telecommunications executive, were approved by the board’s compensation committee on Monday, the spokeswoman said. Shareholders had voted in May of this year to increase the shares available for executive compensation.

“The issue is the board wanted to make sure the CEO had the same economic alignment as was contemplated when he took the job,” said a person close to the company.

The company’s market capitalization jumped from a little over US$100-million at the start of the week to almost US$1-billion by Friday following the deal.

Eastman Kodak also granted options on Monday to three other executives, worth US$712,000 each, according to regulatory filings. Kodak declined to comment on the reason for these awards.

The company has struggled to reinvent itself from a flagging camera company after emerging from bankruptcy in 2013. Its selection by the U.S. government for the production of key pharmaceutical ingredients surprised many industry analysts who expected such a deal to go to a major generic drug maker.

The government’s U.S. International Development Finance Corporation released a July 28 statement quoting Mr. Continenza as saying: “Kodak will play a critical role in the return of a reliable American pharmaceutical supply chain.”

President Trump, too, hailed the development. “I want to congratulate the people in Kodak,” he said at a press briefing. “They’ve been working very hard.”

But never on vaccines or anything remotely close…