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.