Big Blue Ponies Up $9.2 Billion for Share Buybacks
November 2, 2009 Timothy Prickett Morgan
With Penn State only being established in 1855, and there not being much ivy growing on the buildings and the scent of corn and cows all around, I wouldn’t exactly call myself old school. But I guess I am, since I most definitely believe that when companies buy back their shares to prop up their earning per share numbers, this is a load of cow hockey. Particularly when the money could be used for a lot of other things, such as paying better wages, building better products, or maybe doing a little marketing.
IBM is at it again, moving huge bags of greenbacks down to Wall Street so it can buy its relatively price shares, thereby taking them off the market and propping up EPS numbers. EPS is apparently something Wall Street cares about, but man, that is so dot-com boom. What I think matters to Wall Street is actual profits, and growing these is what all investors are looking at. I only look at EPS numbers when companies are making estimates looking ahead and that is the only number they give out. Otherwise, I think it is basically useless because, as Big Blue so aptly demonstrates, companies that have cash can engineer that EPS number anyway they want. They use past profits (or debt) to create future profits.
Anyway, last week IBM’s board of directors–which numbers 13 now that James McKerney, who has the president, chief executive officer, and chairman positions at Boeing, has been named to the IBM board–authorized the company to spend an additional $5 billion buying back shares on the open market. IBM had $4.2 billion in authorizations from the board in place as the third quarter closed, so it now has $9.2 billion it can use to buy shares. And the company said in a statement that it planned to ask for another chunk of change when the board meets again in April 2010.
“IBM’s strategic transformation to higher value businesses continues to drive profitable growth,” said Sam Palmisano, IBM’s chairman, president and chief executive officer, in a statement announcing the buybacks and the payout of the 55 cent per share dividend. “And our strong cash flow performance has enabled IBM to return $73 billion since 2003 to our shareholders.”
IBM has paid quarterly dividends since 1916, the company bragged. But if you have a long memory, like I do, you will recall that IBM paid a $4.84 dividend for all of 1992, and that was slashed down to $1 per share per year as chairman and CEO John Akers ran IBM onto the rocks over the next two years. A dividend is like a pension–it is something you can count on as long as the company is solid. But IBM would rather pull a 401(k)-style maneuver and do what it takes to keep driving up its stock price at a steady pace and buying back big bags of it as a way to reward shareholders. This way, the shareholders have a big chunk of the risk. I would rather have a bigger dividend and less share price growth, personally, in an investment. But what do I know? I am old school.
I would also prefer that IBM take a few piles of cash from that massive $9.2 billion mountain and, I dunno, spend it on a native Web interface for i/OS and maybe a marketing campaign for the i platform.