How These 8 Company Stocks Fared Following Scandal

By Tim Lemke on 5 May 2017 0 comments

From bad business decisions to PR nightmares (looking at you, United Airlines), negative news can crush a company's bottom line and send investors fleeing. But not all scandals — or their fallouts — are the same. Some companies rebound quickly, while others spend years recovering — or go out of business altogether.

Let's take a look at some of the largest corporate scandals in recent memory, and their impact on shareholders.

1. Tyco

This was one of the biggest corporate scandals in the early part of the millennium. CEO Dennis Kozlowski and CFO Mark Swartz were convicted of grand larceny after improperly awarding themselves millions of dollars in bonuses. Details of the lavish $2 million birthday party that Kozlowski threw for his wife made for great tabloid fodder.

Tyco's shares took a hit in the short term, but the company's underlying business in security and fire protection systems was still sound. Over the years, Tyco has split into multiple firms, leaving patient investors with shares of a diverse array of companies — many of which have outperformed the markets. Pentair, a company that acquired one Tyco division in 2012, has seen shares rise more than 40 percent. Johnson Controls bought Tyco last year and then spun off its automotive seating business, Adient. Adient shares are up 55 percent since the spinoff in November. (Disclosure: I own some shares of Johnson Controls, Adient, TE Connectivity, and Pentair.)

2. Chipotle Mexican Grill

The burrito chain faced scandal in 2015 after an E. coli outbreak affected dozens of customers. The company's share price suffered for months as investors wondered whether it had a handle on food safety. Those issues appear to be in the past now, and shares have risen 23 percent in 2017. Still, they fail to come anywhere close to the highs of two years ago.

3. Samsung

Samsung was forced to recall all of its Galaxy Note 7 devices last year after reports of the phones catching fire due to battery defects. The discontinuation of the high-end phone cost the company billions of dollars. Samsung also faced bad headlines when one of its vice presidents was arrested in connection to a bribery scandal. But the markets have shrugged off these missteps.

The company's share price is up more than 66 percent on the Korean stock exchange since this time last year, and up nearly 19 percent in 2017. Demand for Samsung devices remains high, and the company continues to battle with Apple for the top spot among global smartphone manufacturers.

4. Volkswagen

The German automaker found itself in big, big trouble after lying about emissions from its vehicles in 2015. It's now on the hook for billions of dollars in fines. Shares dropped by about 40 percent after the scandal and hit some of their lowest prices in three years. While it appears that customers haven't abandoned the company altogether, and Volkswagen's stock price rose a bit in the first half of 2017, shares are still well below where they were pre-scandal.

5. Exxon

Remember the Exxon Valdez oil spill in Alaska? The oil tanker accident in 1989 led to widespread environmental damage, with 10.8 million gallons of oil spilling into Prince William Sound. The disaster meant terrible headlines for Exxon, as it was sued for more than $5 billion. (It eventually paid about $500 million.)

One could argue that the reputation of the fossil fuel industry was damaged permanently, but Exxon rebounded over time. In fact, Exxon merged with rival Mobil 10 years after the spill and became one of the largest and most profitable companies in U.S. history.

6. AIG

Many companies were impacted by the collapse of the financial sector in 2008. AIG was uniquely hard-hit because it had nearly $60 billion worth of subprime mortgages on its books. The federal government bailed the company out, shares fell by more than 80 percent, and it was pretty much a disaster for AIG and its investors. AIG still exists as a company, but there is no remarkable comeback story to tell here.

7. Enron

The biggest scandal of the dot-com era, Enron found itself in trouble in 2001 following revelations that it had engaged in fraudulent accounting. Enron was trading above $90 per share in mid-2000, but began to fall as journalists questioned the legitimacy of some of the company's financial claims. Within a year, share value was cut in half, and by the end of 2001, the company had declared bankruptcy. Several executives went to jail, charged with a variety of crimes including conspiracy, fraud, and insider trading. And shareholders? Well, most ended up with zilch.

8. United Airlines

United's story is still being written. Shares fell around 5 percent in April, shortly after news broke about a passenger getting injured while being forcibly removed from an overbooked flight. But, shares rebounded rather quickly and are now trading at around pre-scandal levels. United has settled with the passenger it removed for an undisclosed amount, avoiding what could have been a costlier lawsuit. The question now is whether bad publicity will keep flyers away from United and impact its revenue in the coming months.

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