Editor's note: This article was updated to clarify the nature and the amount of the federal money AMR received. It also more clearly characterizes management's response to the company's underfunded pension.
The NBA Finals tip off tonight at the American Airlines Center in Dallas. On Tuesday, the series moves to Miami, where the Heat will host the Mavs at . American Airlines Arena.
A June 1 New York Timesarticle pointed out that this marks the first time a single corporation -- AMR
That's an interesting (if useless) fact, and it got us thinking: Why is a company that hasn't posted a profit since 2000, a company that's losing nearly $1 billion per year, spending millions on naming rights?
As the Times article states:
"In the general sense of supporting our communities, we see a lot of value in it," [an American Airlines spokesman] said, adding that there is no research to prove that consumers choose to fly American because of its arena connections. But the airline reckons there is an intangible connection between fan passions for their favorite teams and the buildings where they watch them play.
Supporting communities . intangible connections . these are noble missions, to be sure, and we applaud the company's efforts at brand- and community-building. But a business -- particularly a publicly traded business -- needs to be a business first.
At what cost?
According to data from ESPN, AMR is on the hook for $195 million over 30 years to the Mavs. That works out to $6.5 million per year. AMR pays the Heat $2.1 million per year for 20 years for the same privilege -- upping the total to $8.6 million every single year.
American Airlines is certainly not alone in sponsoring sports stadiums. Plenty of companies, including FedEx
And while $8.6 million may not be a lot of money to pay each year for a company that's done more than $20 billion in revenue over the past 12 months, over the past five years AMR has laid off workers, received in the neighborhood of $1 billion as a result of the 9/11 attacks, and suffered from a woefully underfunded pension. That it continues to pay up to name not just one but two NBA arenas strikes us as an unfocused use of capital, at a time when AMR should be dead-set on allocating every dollar efficiently.
The virtues of thriftiness
As we see it, companies should use their capital first to maintain their business, then to grow their business if they expect to earn a satisfactory rate of return. If there's excess cash around after that, companies should consider paying or raising their dividend and/or (if their shares are fairly valued or undervalued) instituting a stock-repurchase plan. This is not to say that sponsoring a stadium cannot be part of a smart marketing plan. But for a company that's not profitable and can't point to any tangible benefits from its stadium sponsorships, it just seems like that money could be better used elsewhere.
Many of the market's greatest investments and greatest business leaders are models of thriftiness. They include Warren Buffett and Berkshire Hathaway, Sam Walton and Wal-Mart, and Richard Kinder at Kinder Morgan -- who pays himself just $1 per year in salary. It's not a coincidence that none of these companies sponsor stadiums or arenas, even though they could all afford it and then some.
The sport of business
Don't misunderstand: We're not opposed to naming rights per se. If it's done within the right context -- say, at a healthy business that is allocating its capital efficiently -- it can even strengthen the brand on a national level and strengthen ties on a community level (which is what AMR is aiming to do). Motley Fool Stock Advisor recommendation FedEx, for example, shells out a chunk of change to sponsor NBA and NFL stadiums, but the company brought in $1.6 billion in profits last year, can point to a nearly 19% annual income growth over the past five years, and even pays a modest dividend.
That's why FedEx is a Stock Advisor recommendation -- Fool co-founder David Gardner believed it to be a well-run business with a substantial (i.e., global) market opportunity. It's exactly the sort of business David and his brother Tom look for in Stock Advisor. Unfortunately, Wall Street doesn't always bother focusing on these traits -- yet they've helped David and Tom beat the market by nearly 40 percentage points.
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Neither Brian Richards nor Tim Hanson owns shares of any company mentioned in this article. Bank of America is an Income Investor recommendation. Wal-Mart is an Inside Value pick. No Fool is too cool for disclosure.