Anyone want to guess how much went to share repurchases and how much went to dividends? If you are thinking 50/50, you aren’t even close.

As The Register points out, the share buybacks are a lot more beneficial for IBM executives hoping to keep the earnings per share, or EPS, growing at the proper rate to "earn" their bonuses than they are for shareholders looking to increase the value of their holdings.

Of course, there is nothing illegal or even unethical about IBM’s giant share buybacks, but it does raise the question, "Can’t IBM come up with anything better to spend its money on than its own stock?" If not, shouldn’t shareholders just get a check instead of the world’s biggest pile of treasury stock?

The company authorized an additional $7 billion dollars to buy its own stock this time around while authoring 75 cents per share for its dividend. In other words, the company will spend $7 billion to buy stock and $900 million paying the "owners" of the company, its shareholders.

On an annual basis, that is $3.6 billion for dividends and $7 billion to buy more of its own stock. As a shareholder, that probably isn’t the split you hope for.

Why Do Companies Buy Back Stock?

Companies buy back stock for two reasons. The first reason is that companies often award stock options to their executives and board members. That stock has to come from somewhere. By buying shares, IBM can then turn around and give those shares to its execs and board members.

The second reason to buy back your own company shares is that you believe that your company’s stock is a good value. IBM clearly ALWAYS believes its stock is a good value, since it has way more shares repurchased than it needs to pay out generous stock options.

Of course, the real reason IBM repurchases so many of its own shares is that it allows the company to massage its financials on a per share basis.

For example, if a company has 1 millions shares outstanding and earns $1 million, then it has an EPS, or earnings per share of $1.

If that same company were to buyback 100,000 shares, then there are only 900,000 shares outstanding. The same $1 million of earnings then becomes $1.11 per share. This is 10 percent growth in EPS, even if it is just an accounting trick that happens on paper.

Giant share repurchases theoretically also increase the value of the remaining shares of stock since some of the supply has been removed from the market. However, the stock market has a funny way of deciding what the right price is for a company’s stock all by itself.

It does work. IBM’s stock price has risen steadily over the past few years. How much of that rise comes from real company performance and how much of it comes from the company spending every extra penny to prop up its own stock is for its investors to decide.

No related posts.

IBM Boosts Share Buyback Again originally published at Finance Gourmet

Apple reported revenue of $26.7 billion for its first-quarter which ended on December 25th. (The company uses a fiscal year for its earnings and reporting.) That’s earnings of $6 billion, or 6.43 cents per share, which is up 78 percent from a year ago.

FactSet Research said analysts were predicting earnings of around $5.42 per share and revenue of $24.4 billion.

Not coincidentally, all of this good news comes the day after the company announced that CEO Steve Jobs was taking a medical leave of absence. Apple stock traded ended the day down 2.25 percent at $340.65. Trading in the stock was halted after hours. When it resumed, shares were up in after-hours trading.

Related posts:

1. IBM Earnings Up
2. Apple Stock Good Investment or Passing Fad

Apple Earnings Way Up for Quarter originally published at Finance Gourmet

The company continues to use share buybacks as the primary method to "return money to shareholders." The company’s third-quarter earnings announcement notes that the company, "returned $4.5 billion to shareholders through $0.8 billion in dividends and $3.7 billion of share repurchases," a ratio of approximately 1 to 46.

However, the company did note that its free cash flow was down $300 million to $7.6 billion for the first nine months of the year.

Coming up later today, Apple reports its earnings. The company does not pay dividends at all, preferring to build an enormous hoard of cash for some future purpose.

Related posts:

1. Apple Earnings Way Up for Quarter
2. Wal-Mart Has Good Earnings

IBM Earnings Up originally published at Finance Gourmet

The idea of a stock buyback is that the company figures that its stock is undervalued on the stock market. By buying shares of stock at those low prices, the corporation is increasing shareholder value by making a good investment in itself. Theoretically, those shares repurchased by the company at a low price can be used to pay out earned stock options, for example, at a lower cost.

But, IBM — along with many other companies — has perverted the concept of a share repurchase or stock buyback.

IBM Stock is currently trading near an all-time high stock price. While, it is possible that even at that price per share the company believes its shares are undervalued, that is not what is really going on here.

IBM Stock Buybacks Share Repurchase Run Amok

IBM is not a “new” tech company like Microsoft, Google, Amazon, or Apple where shareholders are accustomed to the company piling up hoards of cash that it has no intention of ever returning to shareholders. Rather, IBM shareholders expect to be paid dividends. This should be true of all shareholders, but the markets have run a long way from reality these days.

For 2009, the company announced that it “returned $10.3 billion to shareholders…”

On the surface, that sounds pretty good. However, what really happened is that the company actually paid $2.9 billion directly to shareholders in the form of dividends and then indirectly returned $7.4 billion to shareholders in the form of IBM stock repurchases.

In other words, that $7.4 billion that was supposedly “returned to shareholders” came not as cash, but as the possible intangible benefits of less shares outstanding.

In certain circumstances the above scenario could be considered a smart fiscal move, or at the very least, a legitimate financial strategy on which reasonable people could disagree.

The problem is that this is not a one-time thing, but rather an ongoing scheme by the IBM Board of Directors and IBM executives who seem to care a lot more about triggering their bonuses than they do about the company shareholders they are supposed to be working for.

IBM Dividends Versus Stock Buy-Backs and Share Repurchases

IBM has racked up a history of lopsided share repurchases versus dividends. While the company loves to tout how much value it returns to shareholders, looking behind the green curtain reveals some troubling trends.

“IBM’s higher value, higher margin business strategy has enabled the return of $91 billion since 2003 to our shareholders through share repurchases and dividends,” said Samuel J. Palmisano, IBM chairman, president and CEO.

Notice how Mr. Palmisano is very careful to include share repurchases in that number, because otherwise, that statement would be: “IBM’s business strategy has enabled the return of $7.6 billion of shareholder value through dividends.” Sounds far less impressive.

Take a look at just the last three years of IBM’s financials and you’ll see the comical lopsidedness of share repurchases compared to dividends.

• 2009 – Dividends: $2.9 billion — Share Repurchases: $7.4 billion
• 2008 – Dividends: $2.6 billion — Share Repurchases: $10.6 billion
• 2007 – Dividends: $2.1 billion — Share Repurchases: $18.8 billion

From 2007 to 2009, IBM spent $36.8 billion buying its own stock. During the same period, the company paid CASH DIVIDENDS to shareholders totaling just $7.6 billion. In three years, the company spent nearly five times more money buying stock than paying dividends. What did shareholders get for all of that stock buying spending spree?

The weighted-average number of diluted common shares outstanding in 2006 (before this 3-year stock repurchase period) was 1.55 billion shares. After spending $36.8 billion, the average number of shares at the end of 2009 was 1.34 billion.

Add it all up, and IBM spent $36.8 billion to reduce the number shares by 210 million, which is the overall net equivalent of paying $175.24 per share of IBM stock.

Don’t forget that IBM stock never traded higher than $130 per share during that time.

It’s not that the there was no value in all of the IBM stock buybacks. Fewer shares means lower supply and a higher-stock price. It also improves certain financial numbers like P/E ratios and the like. However, one has to wonder how much value can be assigned to those things versus the dollar amounts paid for them, especially compared to the intrinsic value of cash payments.

If IBM had forgone repurchasing stock in 2009 and instead paid that $7.4 billion out as dividends, then shareholders would have been paid an additional $5.52 per share for the year, and there would be 1.34 billion shares outstanding instead of 1.31 billion. How much difference in the P/E ratio is made by having 0.03 billion fewer shares?

Which do you think shareholders would rather have?

Why IBM Hurts Shareholders Buying Back Stock Instead of Paying Dividends

Why would IBM pursue a strategy of using much more money to buy stock than to pay dividends when “returning shareholder value?”

The non-cynical answer is that is difficult for any company to cut its dividend. Wall Street likes to punish companies that cut their dividends. This is not an intentional desire so much as a function of stockholders requiring a dividend of a certain size to make an investment in the company’s stock. Thus, when IBM, or any company, cuts that dividend payment, those shareholders sell in order to maintain their desired income.

Increasing the dividend on IBM stock from $0.65 a share to even $1.00, for example, locks the company into paying $1.00 per share dividends regardless of future natural variations in the company’s earnings. Otherwise, IBM becomes one of those stocks with an “unreliable” dividend.

In other words, shareholders would rather get a consistent, but low, payment rather than a high payment that might need to be reduced in the future. Using money to buyback stock is not so obvious, and the company can give many reasons for cutting back on such an expenditure without the stigma of cutting the dividend.

The cynical answer is that the bonuses and payouts for IBM executives and IBM’s Board of Directors are based entirely on the price of the stock. Keeping the price per share high benefits IBM execs much more than paying a high dividend to shareholders does. Ironically, the primary use of all these repurchases shares is to give them back in the form of stock grants and stock options to the same directors and executives setting this financial strategy.

Either way, it seems that shareholders, and the financial media, seem content to swallow IBM’s rosy claims about what a wonderful job it does returning shareholder value without questioning whether even a small percentage of money used to repurchase shares would be better spent paying an increased dividend.

While such a financial strategy’s wisdom could be debated, it seems that there will be no debate, because no one will bother asking the question. Just because MBA courses teach that share buybacks are the same as paying dividends from a balance sheet accounting point of view, does not mean that they are the same thing in the real world.

Image courtesy of Yahoo.com stock charts

No related posts.

Are Share Buybacks Really Good For Shareholders? originally published at Finance Gourmet

Everyone knows that the Q1 2009 news will be bad and that companies probably continue to lose money even today, but the focus will be on what the companies say about the future. Company projections for the rest of the year will determine if Wall Street has been right in predicting an economic turn around and the end of the recession or if the latest rally was nothing more than bottom fishing followed by overly optimistic traders hoping to get in early on the next big up move.

Start your trading machines and keep an eye on the charts because the ride could get bumpy.

Copyright 2009 – ArcticLlama, LLC – All Rights Reserved – Published Exclusively on FinanceGourmet.com

Publication on other websites is a violation of US and international Copyright Laws!

Related posts:

1. 2009 Stock Market Recovery Starts Now?
2. 2011 Stock Market Update Q3

Important Week for Stock Market Coming Up originally published at Finance Gourmet

How are the banks doing, and will any of them be able to make money, or are they just all going to be depending on big government handouts to survive?

Wells Fargo helped answer part of that question Thursday morning when they projected profits of $3 billion or 55 cents a share.

PROFITS?

Yesterday’s news was about how Bank of America would probably need ANOTHER $30 billion or more in order to survive according to certain analysts.  So, today’s news comes not as a shock, but a welcome surprise.  Unfortunately for Bank of America, Wells Fargo’s good fortunes will undoubtedly raise questions about whether or no Bank of America really needs more money, and if so why.  And, of course, why can’t they be more like Wells Fargo.

Even more interesting, the numbers Wells Fargo has stated are AFTER paying preferred dividends.  This is important because the government bailout money that came flowing into banks did so mainly as preferred stock investments.  Some analysts have questioned the bank’s ability to repay the government and the dividends.  Wells Fargo, at least, seems to be able to meet its obligations, and the US government should be happy to hear that $372 million is on the way back. 

If more banks are able to follow in Wells Fargo’s footsteps, then the government banking bailout will be a rousing success, but time will tell if this is wishful thinking on Wells Fargo’s part, or if anyone else will be able to come along for the ride.

Ironically, the main factor cited by the company for its good news?  Mortgages.

While other banks were cowering behind their big metal doors hoping for government bailout checks and for someone else to get the economy going, Well Fargo was lending money to people buying houses, which if you aren’t an idiot about it, and keep your sub-prime lending subservient to your prime lending, can be very profitable.

Of course, all the happy hoopla does not take into account that Wells Fargo did have to cut its dividend from 34 cents per share to 5 cents per share earlier this year, but with the kind of bad news the market is expecting for this quarter’s earnings season, I think we can forgive everyone for looking on the bright side this morning.

Related posts:

1. Are TARP Repaying Banks Good Investments
2. Make Money Working From Home Online Scams

Wells Fargo Proves Good Banks Can Make Money originally published at Finance Gourmet

By the way, we actually aren’t in a recession at all. A recession by definition is two quarters of negative GDP. We haven’t had even one yet. The recession talk is about a “coming” recession. Everybody seems to forget that.

Take a look over at Finance Gourmet where a new article about Should You Pay Off Your Mortgage is up this morning.

No related posts.

Wal-Mart Has Good Earnings originally published at Finance Gourmet