We have recently experienced a significant drop in IBM share price. This kind of drops are inevitable over long term. But what IBM dose with its income determines the value to shareholders over long term. It is clear that IBM prefers to spend large part of it's income in share buybacks. The effectiveness of share buybacks in returning value to share holders is at best suspect. At the surface it looks simple less shares improves PE and thus share price. IBM's over zealously in insisting only effective way to return value to share holders is through buybacks should be alarming to stockholders.When IBM pours profits to buyback coffer, significant part of it pours out through holes. The truth is part of earrings goes to offset shares issued to IBM executives. As long as this is reasonable amount and there is transparency, this is justified, but there is no clarity in this issue. IBM earnings are irrelevant when there is no clarity in how much of it returns to stockholders.
We can no longer afford the share buyback fiasco.
" The truth is part of earrings goes to offset shares issued to IBM executives. As long as this is reasonable amount and there is transparency, this is justified, but there is no clarity in this issue. IBM earnings are irrelevant when there is no clarity in how much of it returns to stockholders.
We can no longer afford the share buyback fiasco"
l Look at buybacks as a perpetual investment akin to buying a debenture without a maturity date as it's not a one time outflow like a dividend payment. You buy back shares based on current cash flow per share -- Operating cash Flow or Free Cash Flow which in IBM's case is approximated by Operating EPS per share which is pretty much cash flow per share after tax. So that's a measure of current return but the future annual return on purchased shares depends on growth of Total corporate cash flows each successive year which serves as the numerator for per share computations.. Take for example the $18.8 bil spent on shares in 2007 bought in at just under $106. If you use the $16.70 Operating EPS boggy then at $16.70 / $188 yields about a 9% return at current market -- the shares bought in at $106 yield 15.8% this year.
It is a tad amorphous in that you can't count old shares but turn it around and look at it from the prospective of an individual investor and measure the value of shares he bought in 2007 for $106 -- there's cap gain and a current 3.2% cash yield on cost.
You are making a plausible argument. But my point is If IBM spends $2000 in share purchase at ($200 per share) then total number of outstanding shares should decrease by 10. This is not the case and IBM shares decreases only by 7 shares and 3 shares goes to offset the shares issued to senior IBM executives. There is just no transparency on how much of the earrings is funneled to executive share program.
The point I am making is how effectively income is returned to stockholders.