Apple reports earnings on April 24. This report is actually for earnings from the 2nd quarter of Apple’s fiscal year, even though corporations on a calendar year are reporting first quarter earnings right now. (Several tech companies reported earnings last week.)

After a rough week for the company in the headlines, these earnings will likely be used as a gauge for the short-term future of Apple stock.

Recently, Apple has been the subject of legal action from the Justice Department regarding alleged price-fixing for ebooks. Although this makes up a tiny portion of Apple’s revenue, it is a major key in how the Apple store works. If there is a problem with this model for books, there could conceivably be issues in other markets as well.

What is not in doubt is that Apple will continue to dominate the tablet computer market and that its prolific iPhone will continue to be a huge player in the smartphone market. There is little doubt among analysts that things in the marketplace look good for Apple in both the short and long-term.

In fact, the only real question about Apple stock these days seems to be whether the company’s shares have risen too far, too fast. The stock, which hit $600 earlier, has declined to closer to $575 per share. There are two main concerns about Apple’s stock. One, is have investors simply gotten ahead of themselves, in which case share prices would hold at this level or rise much more slowly going forward. The second is has the company’s extraordinary growth finally topped out, in which case, share prices might need an actual reset in the marketplace.

As CEO Tim Cook likes to point out, the markets Apple is in are huge and they are growing. Additionally, it isn’t like Apple has an 80 percent market share in mobile phones. There is theoretically plenty of room for Apple to grow there.

However, just because Apple doesn’t dominate the entire smartphone market, it may dominate the smaller high-end smartphone market. In other words, if everyone who wants, and can afford, an iPhone already has one, then the company’s growth is on shaky ground. There are few analysts, however, who espouse this theory.

Some technology pundits have begun suggesting that Apple will see reduced subsidies from carriers for the iPhone. However, Apple has multi-year agreements with carriers, so any impact from such a move would be down the line. In addition, unless a dazzling Windows Phone or Android phone comes to market, Apple still has remarkable leverage with carriers. In fact, some analysts question whether Sprint gave up too much to be in the iPhone market. That isn’t something that you worry about right before a company is forced to agree to less favorable terms.

Expect Apple’s stock price to move dramatically following the earnings announcement, but the expect whatever movement occurs to be tempered over the coming weeks as clearer heads prevail.

• Check Apple’s investor relations webpage to listen in on an audio webcast of the earnings conference call.

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Apple Earnings Good or Bad? originally published at Personal Finance Blog - FinanceGourmet.com

This past week featured the earnings release of several major technology companies, coming closely on the heels of major earnings announcements from other tech companies, including Google and Apple.

IBM Earnings

First up, IBM reported revenue of $24.7 billion leading to earnings of $2.78 per share. The consensus estimates from analysts were a bit higher for revenue, but a bit lower for earnings per share. The company did raise its full-year earnings guidance, but it wasn’t enough. Investor reaction wasn’t pretty with shares dropping 2.4 percent the following day, and continuing down. The technology giant closed on Tuesday before reporting earnings at 207.31 and closed Friday at just 199.55. IBM’s results have also been blamed for the general downward direction of the markets for the end of the week.

Still, IBM has a long history of boosting its share prices, primarily by buying back enormous amount of stock each year.

Intel Earnings

Intel’s earnings didn’t make investors any happier. The stock has had a pretty good run-up as of late, so anything other than a gangbusters quarter was likely to lead to a poor reaction. Intel shares got it. The stock closed before earnings on Tuesday at 28.48, but finished the week at 27.60.

The company reported revenue for the first quarter of $12.9 billion and net income of $2.74 billion. Earnings per share were 53 cents.

Microsoft Earnings

Microsoft reported earnings on Thursday. Unlike Intel and IBM, the software giant’s earnings news did not disappoint investors. Rather, the stock rallied more than five percent on Friday.

The company reported third-quarter results (of its fiscal year) of $17.4 billion in sales and a $5.1 billion, or 60 cents per share, profit. Although 60 cents is slightly lower than last year’s 61 cents a share profit, that number included a one-time tax benefit to the company’s bottom line.

The big news out of Redmond was that personal computer sales rose last year. Many technology pundits have been forecasting a decline to the rise of personal computing devices like tablets and smartphones. That data translated into a four percent increase in Windows sales ahead of next year’s release of Windows 8, which, once again, is considered a make or break product for the company.

It wasn’t all good news. The company reported lower sales in its entertainment business, which consists primarily of its Xbox gaming system. The aging platform is reaching saturation, where pretty much anyone who wants to have a current Xbox system already has one. Since the company isn’t expected to release an update to the system in the near future, this is an area where weakness will likely continue.

EMC Earnings

EMC is the world’s largest maker of corporate data storage equipment, and the owner of VMware. It’s earnings, therefore, show specific insight into how big business technology spending is going.

The company earned 37 cents per share on revenue of $5.1 billion, an increase of 11 percent. The company attributes much of that gain to continuing demand for cloud computing. However, the company’s outlook for the future disappointed investors who dropped the stock down four percent on Friday.

eBay Earnings

On Wednesday, eBay reported quarterly revenue of $3.3 billion, and a profit of $725 million or 55 cents per share.

The company, which also owns popular payment service PayPal, foretasted similar profits for next quarter.

Unlike the others, eBay’s earnings impressed investors who pushed the stock price from a Wednesday close of $35.87 to a close on Friday of $40.29.

Tech Forecast for 2012

The outlook for technology stocks for 2012 looks mixed right now. If the economy manages to maintain its slight upward growth, it looks like the tech bellwethers will be in good position to capture the upside. However, if economic growth fizzles, it looks like customers and business will have no problem quickly retrenching and quashing tech spending for the remainder of 2012.

If you are going to be investing in tech during 2012, keep a sharp eye on the economic indicators going forward. The industry does not have the momentum to rise in the face of an overall decline in the economy for the remainder of the year.

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Tech Earnings Week originally published at Personal Finance Blog - FinanceGourmet.com

Google just reported its quarterly earnings. They did very well, beating pretty much every analyst’s numbers. Those who want to nitpick will complain that the price per click has gone down. However, that isn’t really surprising considering that the number of clicks went up. There are some issues coming with Google’s stock, but this isn’t one of them.

Google Cost Per Click Down

Google’s advertising model is based on advertisers paying either “per click” or “per impression.” Actually, advertisers pay per every thousand impressions, but that isn’t the point. Advertisers who pay using the per click model pay a certain amount each time someone clicks on their ad, but nothing if the ad goes unclicked.

A smart online advertiser using the per click model will determine how much each click is worth. There can be many ways of determining this, and numerous intangibles are considered by some advertisers. However, the most simple concept would be something like this.

Maximum payable cost per click = Amount of revenue generated per click / Number of clicks necessary to generate revenue.

In other words, if you generate $1 per transaction (this is called a conversion) and it takes you 10 clicks to generate one transaction, you can pay no more than 10 cents per click, which break even. You’d have to pay nine cents per click to generate a profit.

Google chooses which ads to display using an algorithm that takes into account several factors including the quality of the ads, how often they are clicked, how often they convert, and so on. However, all other things being equal, the highest paying ad is placed first. Furthermore, each advertiser can set various limits on the way their ad dollars are spent. When an advertiser’s limit is reached, his ads no longer display, regardless of their offering price.

With this in mind, we can see that if the number of clicks go up, the cost per click will go down, assuming all other factors are unchanged.

Here is how it looks.

• Advertiser A offers 50 cents per click, up to 1,000 clicks per some time period.
• Advertiser B offers 25 cents per click, up to 1,000 clicks per some time period.

That means that:

• The CPC will be 50 cents so long as there are 1,000 or less clicks.
• The CPC will be less than 50 cents if there are more than 1,000 clicks.
• The more clicks there are beyond 1,000, the further the CPC will drop.

As you can see, if advertisers make no changes to their advertising budgets and limits, the CPC will always drop when the number of clicks increases.

In fact, if the number of clicks and the the CPC increase at the same time, then that is an indicator that advertisers have dramatically increased their ad spending on Google. Because, in order for both the CPC and the number of clicks to increase, the additional CPC must offset the lowering power of an increasing number of clicks.

The other big news out of Google’s earnings today was the so-called stock split being used to shore up the founder’s control of the company. This isn’t really necessary, and we’ll explore why tomorrow.

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Google Lower Cost Per Click Doesn’t Matter originally published at Personal Finance Blog - FinanceGourmet.com

Just got the 2011 IBM annual report. It never ceases to amaze me how much money this company puts into share repurchases, rather than actual dividends.

For 2011, the company boasts that they were “… able to return $18.5 billion to you,” the shareholder. Of course, a paltry $3.5 billion of that was actually returned to shareholders in the form of a dividend. The remaining $15 billion went into buying back shares, which does a lot more to make it easier for executives to meet various per share bonus targets than it does to enrich shareholders. Theoretically, shareholders benefit from fewer outstanding shares, but I bet most shareholders would have benefited more from a triple-size dividend payment.

Any way, this is par for the course for IBM which spent $15 billion in 2010 and 2011, and $7.5 billion in 2009 buying back its stock. And, it isn’t done, yet. The board has already authorized the repurchase of $8.66 billion more stock, and there is little doubt the board will approve a new $15 billion or more in share repurchase authorizations for 2012.

As a shareholder, you must factor this into your investment. Your dividend will be substantially lower than it should be from a company of this size and health, but over the long-term, you may benefit from the ongoing reduction in the amount of IBM shares outstanding.

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IBM Share Repurchases Continue originally published at Personal Finance Blog - FinanceGourmet.com

IBM must really hate the idea of paying a big dividend. Every year, it seems, IBM authorizes billions of more dollars for share buybacks while increasing its dividend by the smallest amount possible. Then, the company goes on to crow about how it has returned "… over $109 billion since 2008 to our shareholders through share repurchases and dividends."

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.

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IBM Boosts Share Buyback Again originally published at Personal Finance Blog - FinanceGourmet.com

Most analysts had expected a big quarter for Apple, propelled by big holiday sales numbers. They were right; they just didn’t go high enough with their estimates.

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.

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Apple Earnings Way Up for Quarter originally published at Personal Finance Blog - FinanceGourmet.com

IBM reported its 2010 third-quarter earnings today. The company reported earnings per share of $2.82 which is up 18 percent. The company did not announce any increase in the dividend paid per share, although that was not unexpected.

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.

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IBM Earnings Up originally published at Personal Finance Blog - FinanceGourmet.com

IBM released their quarterly earnings. As is customary, the company announced various financial numbers like how much it earned per share and how much revenue it generated for the quarter, and so on. As is customary for IBM, the company also announced yet another giant share repurchase using shareholder money to buyback IBM shares of stock.

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

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Are Share Buybacks Really Good For Shareholders? originally published at Personal Finance Blog - FinanceGourmet.com

This coming week will be an important one for the stock market.  With some analysts calling the recent month long up trend a bottom, investors will be closely watching earnings reports from US companies releasing this week.

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

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Important Week for Stock Market Coming Up originally published at Personal Finance Blog - FinanceGourmet.com

While traders and investors have wondered whether or not the recent stock market rally signaled a bottom for the markets, another question has hung in the air.

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.

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Wells Fargo Proves Good Banks Can Make Money originally published at Personal Finance Blog - FinanceGourmet.com