Thoughts On College Endowments

Several months ago, I wrote an editorial in the Deseret News in support of the tax deduction for charitable giving.  I have been thinking about the part encouraging distribution of charitable funds since the National Association of College and University Business Officers (NACUBO) released it's annual study of endowments.  I found several points of interest in the study:

• The study covers 839 organizations with an average endowment size of just under $500 Million.  That translates to total endowments at these schools of $417.4 Billion!
• The five largest university endowments (or the top  0.6%) of schools hold 24.4% of the total assets.  The five largest endowments are:
• Harvard $31.7 Billion
• Yale $19.4 Billion
• University of Texas System $17.1 Billion
• Princeton $17.1 Billion
• Stanford $16.5 Billion
• The 10 largest endowments hold just over a third of the total assets of all 839 schools
• 75 organizations have an endowment over $1 Billion
• The average return of all endowments in the study during the most recent academic year was 19.2% (crude math suggests this is approximately $67 Billion before additions, withdrawals, etc)
• The average spending rate during the same period was 5.2%
• The average endowment that has over $1 Billion in assets holds a full 60% of those assets in alternative investments.  That means over $100 Billion of these endowments has been invested in hedge funds, private equity funds, real estate partnerships, etc

 While I'm shocked at the resources that are being amassed at the most sophisticated organizations (largely because of the tax breaks that enable them), I do not believe that curbing the tax deduction for charitable giving is the answer.  I believe other things can, and should, be done to encourage larger distributions from endowments.

College Bowl Economics

Many people are frustrated with the BCS system in college football for a number of very good reasons.  However, I am doubtful the system will change in an expansive way because the economics suggest there is little incentive for it to change.

A growing inequality exists between the smaller bowl games that will begin on Saturday and the games that will be played in January.  Here are a few examples:

• Potato Bowl (formerly the Humanitarian Bowl) - Generates revenue of less than $2 Million.  Team payouts for game participation are $500,000 combined.  Broadcast revenue is less than $200,000.
• New Orleans Bowl - Generates revenue of approximately $2 Million.  Team payouts for game participation are $650,000 combined, and broadcast revenue is a little over $100,000.
• Holiday Bowl and Poinsettia Bowl - The same association puts on both bowl games which generated a combined $10.7 Million of revenue last year.  Team Payouts were a combined $4.2 Million, or more than the combined revenue of the bowl games in Boise and New Orleans.  Broadcast revenue in San Diego was $1.8 Million last year.  Finally, this association currently hold approximately $4.7 Million of cash!
• The non-profit committees that put on the Orange Bowl and the Sugar Bowl hold approximately $20 Million and $21 Million respectively of publicly traded investments!
• "The Granddaddy of Them All" (aka The Rose Bowl) generated revenue last year of $54 Million.  The participation payouts amounted to just under $18 Million per team.  I know, they have a parade and do other things as well.  Ok, so they only attributed $46 Million of their revenue to the Rose Bowl.  However, the BCS National Championship Game was worth $54 Million of revenue (on top of the $43.7 Million generated by the Rose Bowl the same year) for the organization.  That year, payouts to the four schools (Rose Bowl and BCS Championship) topped $70 Million! 

So, a basic bowl game generates somewhere between $2 Million and $5 Million of revenue.  If the bowl committee is lucky and does a nice job over time they may be able to generate 10% of the revenue received by the Rose Bowl or the BCS National Championship Game.

Please correct me where I am wrong, but I just don't see how college football can maximize revenue through a playoff system.

A Peek Inside The Budget of BYU's Athletic Department

BYU doesn't typically disclose anything about their finances.  In fact, about the only thing they disclose about their athletic department budget is a pie chart showing the percentage of operating revenue that comes from various sources.  It shows the following revenue sources:

• Football Ticket Sales - 23%
• Tuition Allocation - 21%
• Donations & Endowments - 16%
• Corporate Sponsors - 9%
• Sports Camps - 8%
• Conference/NCAA - 7%
• Basketball Ticket Sales - 6%
• Other - 5%
• TV & Radio - 4%
• Ticket Sales (Other) - 1%

It is the 7% that comes from the conference and NCAA that is especially interesting because those numbers are public (if you do a little digging).  It turns out that the BYU athletic department received $1,485,373 from the Mountain West Conference and the NCAA during this period.  With a little math, it's easy to calculate that BYU's athletic budget is between $20 Million and $22.8 Million (accounting for potential rounding around the 7% figure).  Let's say BYU's athletic budget is approximately $22 Million.

How does this compare with other schools?  A few points of contrast:

• During the same year, the athletic department at the University of Florida had revenue of $107 Million; including donations of over $39 Million.  
• After turning $6.5 Million over to the University, Florida's athletic department still held over $27 Million of publicly traded securities at the end of the year.
• The Big Ten conference distributed over $20 Million to each school during the same year
• The Rose Bowl distributed over just under $18 Million to each school/conference that participated in the Rose Bowl this year

One question that arises is how does BYU compete against schools with an athletic budget that is 4-5 times as large each and every year?  I know BYU has additional concerns besides generating additional revenue.  They like things like "exposure."  However, at it's core, that's a financial issue as well because BYU relies on the same donor base to support the athletic department as well as things like BYU Broadcasting.  That's a sobering thought to this Cougar Club member.

Warren Buffett, Bank of America, and Taxes

Yesterday, Bank of America announced a $5 Billion investment from Warren Buffett's Berkshire Hathaway.  I had two thoughts.  First, even though the terms are significantly more attractive than similar deals struck during the financial crisis in 2008, Bank of America just received some very expensive financing that they claim they don't need.  Second, Buffett's recent editorial on raising taxes somehow failed to mention the huge tax breaks his company will continue to receive with these types of deals.

Bank of America is receiving better terms than Goldman Sachs, General Electric, and others received from Buffett following the Lehman Brothers bankruptcy in October, 2008.  Bank of America received $5 Billion for preferred stock yielding 6% (redeemable at a 5% premium) and warrants to purchase 700 Million shares of common stock at $7.14 each.  Goldman Sachs and General Electric received $5 Billion and $3 Billion respectively from Buffett in October, 2008 for preferred stock yielding 10% (redeemable at a 10% premium) and warrants to purchase common shares.  Even though pricing appears to have improved significantly, this is still expensive capital for Bank of America.  Bank of America didn't receive approval to increase the dividend to common shareholders this year, but they are able to pay Berkshire Hathaway $300 Million a year?  Not only that, but Buffett gets at-the-money warrants as well?  That just shows, once again, that Buffett enjoys a special place in our economy and is able to make investments that aren't available to others.

Warren Buffett also made headlines with his editorial requesting an end to preferential tax treatment for "billionaires and millionaires."  While I tend to agree with him regarding his point on the regressive nature of payroll taxes, I chuckled a little when the Bank of America deal was announced.  Why?  Because Buffett mentioned that higher tax rates should apply to dividends and interest income at the individual level.  He remained silent on the tax treatment of dividends at the corporate level.  Typically, companies like Berkshire Hathaway get a tax deduction for 70% of the dividends received from other companies.  The argument in favor of this "dividends received deduction" is the same argument for lower tax rates for individuals - avoiding repetitive taxation on corporate profits.

There is something mildly amusing about somebody who can preach tax fairness one day and then utilize the same tax code to shelter $210 Million of company income a few days later.

Lockouts (NFL and NBA)

St. Louis Rams linebacker Bryan Kehl  had time to stop by a Chamber of Commerce golf outing a couple of weeks ago because of the NFL lockout. 

 

The NFL owners have voted to approve a new labor deal with the players, and it appears things are progressing so that we will have professional football this season.  While this will have significantly more financial impact on a company like News Corp than their troubles across the pond, I believe there are two additional lessons from the NFL experience.

 

First, even when progress appears to be excruciatingly slow, deals can come together very quickly at the very moment when pain is about to set in.  In the NFL case, both the owners and the players didn't have enough incentive to find agreement until now.  It appears that a deal only came together once there was a real threat that regular season games would be lost.  Several months ago, politicians in Washington finally agreed to a budget deal in a similar fashion on the eve of a partial government shutdown.  Personally, I believe history will be repeated, and Washington will find a solution to the current debt ceiling debate.

 

Second, I'm afraid the economics suggest the NBA lockout will be more protracted.  The NBA television contracts are guaranteed for 365 days following a work stoppage.  That is approximately $29.4 Million of revenue for each NBA team this season regardless of whether games are actually played.  That's a lot of flexibility for the owners.  The players are trying to find some of their own staying power by agreeing to play in Europe, etc.  In other words, pressure isn't even building yet for everyone in the NBA to come together to get a deal done.

One last thought on the NBA television contracts.  The NBA must negotiate fair value with the networks if payments are made for canceled games.  However, the payments are made according to the contractual schedule, and then any fair value negotiations are made once play resumes.  In the event that the NBA lockout continues until the end of 2011, Disney is on the hook for $120.47 Million and Time Warner is responsible for $133.67 Million.  That is, these two companies will pay $250 Million with a promise to negotiate value once play resumes!  Obviously, there would be additional payments if the lockout headed into 2012. 

Thoughts on Charitable Giving

Giving USA recently released their 56th annual report on philanthropy.  They do a terrific job of estimating the amount of charitable giving in America and tracking it on an annual basis.  I think it's always a fascinating report to review, and this year was no exception.  For me, there are three main lessons this year:

1. "Revised" numbers confirm 2009 was a difficult year for non-profits, and the pain still isn't over.

The original estimate of charitable giving for 2009 was $303.75 Billion.  However, that number was revised down by 8% to $280.31 Billion.  While the reported number for 2010 "increased" $10.5 Billion to $290.89 Billion, this is still 4% lower than the original number reported for 2009.  The vast majority  of this revision was not allocated out to individual areas, but there were minor negative revisions in the religion, education, and human services categories.

2. Life for the upper class is getting back to normal while the lower class continues to struggle.

I know I'm generalizing here, but charitable giving continues to grow in areas attractive to some in the upper class.  International affairs, the arts, and gifts to private foundations all increased from 2009 levels.  On the other end of the spectrum, giving to Human Services was revised down by 2% from the original 2009 estimate.  In addition, the 2010 number in this category includes $1.07 Billion for relief in Haiti.  If this is taken out, 2010 giving in the Human Services category declined by 6.2% from the original 2009 estimate.  In other words, fewer private resources appear to be available to meet basic human needs of those among us who have the least.

3. Religion continues to be big business.

Giving to religious organizations continues to be very stable at approximately $100 Billion a year.  This is the single largest category, and is roughly the size of the next three categories (education, private foundations, and human services) combined.  Hopefully, this is the mitigating factor to the second point above as many religious organizations spend significant resources to help meet basic human needs.

One other quick thought on the subject of religious giving.  I like football as much as the next person (I'm a long suffering Minnesota Vikings fan), but I've started thinking about that $100 Billion a year Americans "spend" directly on religion every time I read an article on the NFL lockout and their difficulties as a $9 Billion a year business.  It just helps to understand what our priorities really are.

I find great hope that most charitable giving is still done by individuals rather than corporations or foundations.  Most people do not give to charity because of a marketing campaign.  They give money to ease suffering, provide opportunities to others, and create a better society.  While most charitable giving is not specifically noticed, I love reading the summary each year.

Is Old Tech The New Annuity?

A question from a friend got me thinking about the capital allocation strategy of established technology companies.  "Old tech" has become incredibly efficient at generating profits and returning those profits to shareholders in the form of share repurchases.  In other words, they have essentially become corporate annuities that generate a cheaper profit stream that U.S. Treasury bonds.

I pulled various information for Intel (INTC), Microsoft (MSFT), Cisco (CSCO), IBM (IBM), and Hewlett Packard (HPQ).  The following summary is for the five year period from 2006 to 2010:

• Cumulative Net Income for all companies was $244.4 Billion
• Cumulative amount spent on share repurchases for all companies was $238.6 Billion

These five companies spent 97.6% of their combined Net Income on share repurchases over the last five years! Now, what happened to their share counts during that time?  Over the last five years, the decline in shares outstanding (fully diluted) for each company were:

• IBM      20.91%
• HPQ     18.46%
• MSFT   18.15%
• CSCO  11.55%
• INTC    7.80%

Intel has spent the least amount (both on an absolute basis as well as a relative basis) on share repurchases, but they had two years when they spent over $1 Billion on share repurchases and the fully diluted share count actually increased.  That's not that exciting.

What is perhaps the most impressive is that while IBM spent 5 years and almost 100% of their Net Income to buy back 20.91% of the company their annual net income almost doubled to $14.88 Billion.  Hewlett Packard and Microsoft have also been able to buy back substantial blocks of their respective companies while substantially growing earnings over the last five years.

The 10-year treasury finished today with an annual yield to maturity of 3.134% - an implied P/E ratio of 31.9x for guaranteed zero growth.  These five tech established tech companies trade between 9.14x and 14.13x earnings, are returning substantially all Net Income to shareholders, and are growing earnings at various rates.

While I do not own any stock in these companies, I do own TBT which is short U.S. Treasury's.