Tyler Crowe

And we had a couple of people write in specifically about a couple of companies.

But I wanted to hit this one first, because this one just absolutely tugged at my heartstrings, because it's an esoteric balance sheet question.

And it comes from Shannon.

And the question is, Starbucks and Domino's Pizza currently have negative stockholder equity.

Would you please address how an investor might interpret negative stockholder equity in a company and whether it's a sign of poor capital allocation?

Guys, I think I'm in love, but just give me a minute for here.

And I'm going to explain this because this is kind of like wonky balance sheet stuff that I love to get into.

So

You can basically have negative equity for two reasons.

You can lose money over time and have negative retained earnings.

You have unprofitable companies for a long time.

But you can also have negative retained earnings and negative equity if, for example, a company buys back a lot of its stock or pays a generous dividend.

Because dividends are not retained earnings and bought back stock is called treasury stock and it goes against the earnings of a company.

So if you buy back more stock than you earn and retain in earnings, you can actually dwindle down the equity in the company to the point of zero.

As you mentioned, Domino's is a version of this, and Starbucks is a version of this, and there's several other companies too.

I think it's either Moody's or MSCI, both companies that have negative shareholder equity, because they've done so much to reward shareholders with buybacks and dividends that they don't have shareholder equity anymore.

When you see this, you have to look at it as whether or not the company is doing it because they're unprofitable or because they're throwing a bunch of cash back to its investors.

In this case, I would say,

at least in Domino's and Starbucks' case, over time, it's been good capital allocation because they have been able to enhance shareholder returns through buybacks and dividends to knock down the equity.

So I hope that answers your question.