What makes this story so bullish is the big share buybacks the company has in store. Fewer shares means higher EPS which means a higher stock price as the result of a lower PE.
Buybacks do not improve the real profits of a company at all. They merely reduce the number of shares involved in the eps computation.
Buybacks may in fact reduce the profitability of the company since the money used for buybacks is not available to invest in and grow the business.
tex, good to hear from you again ...
please note that the buybacks do nothing at all , if the
shares are not retired. Companys often buy back stock and
just put it in box until needed. granted, while holding it,
the supply is a little pinched, but it's the same quantity to
calc. per share anything ...... IBM does not retire all that
much of what has been bought back. They have spent something
on the order of $ 160 billion , using an avg. price of
100, that should have retired aroun 1.6 billion shares and
there were would around 400 million shares outstanding ...
there's still about 1.3 billion outstanding ... the rest
have been used to buy companies, incentivise special
employees, and for stock purchase plan ...... the buybacks
have not been a boon for investors, a bigger div would have
done much more for the stock price .... later . g
Buybacks increase the earnings applicable to the shareholders. It's that simple. IBM has plenty of money to invest in the business and to acquire relatively large companies that would add to it's capability. The buybacks have not in any way created limitations as the cash flow is strong. Additionally when a company buys back it's own stock it's no different than buying another company. If it's own stock is a better investment than what otherwise is available it's the smart thing to do. If Obama is going to raise taxes on dividends the buy backs will probably be increased. Per share earnings are what gives them intrinsic value whether or not the market price goes up. WW
I'm simply claiming that it's more complex that you would like to admit. A company can roll a $200 million debt into a $250 million debt and the cash flow will look positive - they can pay off $100 million and borrow an additional $150 million. There are more complex issues related to share buy backs because buying back shares reduces the dilution effect and the accounting treatment is not perfectly defined, so - for example - money borrowed to reverse the share dilution from option exercises can be reflected as increased cash flow.
"Paying off loans is an outflow that does not appear in the operating cash flow statement."
The SEC specified format of cash flow statement requires presentng a bridge betwen a beginning cash balance and an ending cash balance. All cash infows and outflows in the format specified are required to establish the new cash balance on the new balance sheet.
As shown in the cash flow statement from Yahoo below, in the section titled "Financing Activities" you can see IBM increased debt by $12.112 bil in 2007 to do the big, one-time stock buyback and then repaid a net $2.445 bil of debt in 2008.
So are you claming that you have discovered a new way to spread groundless innuendo about IBM's cash flow statements distrbuted to the public? Your post is about NOTHING:
m.rowe56 is right on every point. His sarcasm is well justified. You can thank him later.
Seriously, if there was a simple fixed functional relationship like you said, IBM won't have to sale anything more. It could just buy all its shares and its stock price would be infinity. Market has indeed priced IBM's buyback announcement in a few milliseconds after the announcement. Additionally, more and more, it is likely discounting these " buyback news," because these have become routine for IBM and the market has figured out that the EPS is rising more due to buybacks than any fundamental strenght of the business. In other words, it is so obviously engineered.
[Of course, IBM simply won't be able to keep buying its shares if it just kept going up. Still, the thought experiment is a useful one to dispel the common fallacy you fell for. Hope this helps.]
"Additionally, more and more, it is likely discounting these " buyback news," because these have become routine for IBM and the market has figured out that the EPS is rising more due to buybacks than any fundamental strength of the business. In other words, it is so obviously engineered."
IBM needs to invest its cash flow as it is relatively strong compared to its peers. There is no reason to build up a cash hoard -- IBM could touch $16 bil of Free cash Flow in '09 -- IBM needs to make acquisitions for cash, pay down debt, or buyback its stock.
Since the corporate debt taken on for the big '07 accelerated buyback was down about $10 bil to a level of $2.5 bil at this Q3 end -- the IBM board decided to get back on track with more big buybacks.
If you compare IBM's cash flow to HPQ it's easy to see that IBM's cash and free cash generation is just about double HPQ's cash flow -- HPQ just reported '09 with a Gross Margin of about 23.6% -- IBM should come in about 46% for the year -- IBM's Operating Margin is about 2x HPQ as well. Since IBM generates much more cash than IBM there is no way HPQ could match IBM on buybacks -- the $12 bil buyback HPQ just announced will take twice as long to execute (see below) -- which is a reason why HPQ has so many more shares outstanding and why its cash dividend is so much smaller than IBM.
There is no aspect of a company more fundamental than cash flow -- IBM is using the big cash flow from its high gross margin model to benefit shareholders in a straightforward and simple manner.
The buyback was extended an additonal $5 billion. On top of that they intend to request additional authorization at the April board meeting. I gather you think this is bearish based on a general backwards thinking that you have. You would also believe that their lower interest expense going forward is bearish. Pre tax margins are expanding, let me see, that's bearish too right ?
please give up on this "share buyback" program. It is a failure and an illussion. The reason being that it has become a level playing field in that ALL successful companies are buying back their shares and simply put, mathematically EPS is adjusted accordingly. It is now expected and pre-calculated THAT SINCE IBM bought back gazzillions of shares then the EPS should be ...... whatever. It ALWAYS comes down to REVENUES and perceived future revenues. Playing around with outstanding shares does nothing, absolutely NOTHING to convince an astute investor to buy more shares.
"It's not a cheap stock. If IBM had strong earnings, the stock would not have fallen $10 after the last earnings announcement. Problem is that earnings are being engineered by cost cutting, and cost cutting is not a good long term business."
I can't agree. There were other circumstances that paved the way down after Q3 release.
Also you have to compare IBM to its peers in a meaningful way as well as a relevent index like the DOW or S&P for any "price action" stock analysis to be worth anything.
It's not a cheap stock. If IBM had strong earnings, the stock would not have fallen $10 after the last earnings announcement. Problem is that earnings are being engineered by cost cutting, and cost cutting is not a good long term business.
Fine, you don't like the buybacks. That's illogical. I do, I find it to be bullish and a reason to own the stock. The fact that they continue to beat on EPS is another primary reason to be an owner of course. This is a cheap stock really.