Big Blue gives Big Sam big bags of cash
Not for himself, but for stock buybacks
IBM's board of directors wants to give the company's top brass plenty of maneuvering room to engineer the earnings per share growth that they have promised Wall Street, and therefore has authorized the company to spend an additional $7bn on stock buybacks.
When combined with $5.2bn in monies left over from IBM's previous stock buyback, the board authorization gives Big Blue the ability to spend $12.2bn on its shares, albeit at a hell of a price.
"IBM’s higher value, higher margin business strategy has enabled the return of over $109 billion since 2003 to our shareholders through share repurchases and dividends," proclaimed Sam Palmisano, IBM's president, CEO, and chairman in a statement announcing the buyback. "Shareholders can expect that as IBM enters its second century we will continue to invest in new products and services, while expanding IBM’s business into new, emerging markets."
As El Reg goes to press, IBM's shares are trading at $181.94 apiece, and it has 1.2 billion shares outstanding. Spending all that cash right now, today, would take about 67 million shares off the market and that would boost earnings per share by 5.6 per cent in the coming quarter, assuming flat actual earnings.
Of course, none of this financial engineering actually does squat for actual net earnings. But IBM's execs get paid based on how EPS grows, and this is how they ensure their own bonuses and a rising share price on Wall Street that is yet another bonus to them. Imagine if IBM invested $12.2bn in product development, sales, or marketing. Or acquisitions.
With the company having only $11.3bn in cash on hand as the third quarter came to an end, the company can't even do that. But IBM will generate several billions more in free cash flow in the December and March quarters, allowing the company to spend down this authorization and pay its dividend, which comes to 75 cents per share per quarter.
In a related item, David Farr, chairman and CEO at Emerson Electric Co, will be added to IBM's board of directors, effective January 1. Among many other things, Emerson makes power distribution and cooling equipment for data centers. Farr hails from Elmira, New York, not an hour from the suburb of Binghamton called Endicott, where Big Blue was founded 100 years ago. ®
What's wrong with stock buybacks?
When a company gets as big as IBM, it's much harder to use the money internally. Small acquisitions don't really move the earnings needle, and big acquisitions are few and far between -- does anybody think the Feds would have allowed IBM to buy Sun, for instance? -- so IBM tends to focus on acquisitions that bring in specific technology or expertise that can be multiplied by inclusion in established product lines.
There's also a limit on how much R&D you can usefully do. IBM still does a huge amount of basic research, but beyond a certain point it's diminishing returns. And I hope we all know it doesn't usually help to throw more programmers at established, staffed teams?
So instead, IBM returns the money to shareholders, some of whom will use the money to invest in other opportunities... which is exactly the way capitalism is supposed to work.
But hey, feel free to go on believing that you know how to run a multinational organization better than the CEO and board of directors of IBM.
When you say 'Big Sam
I assume you mean Allardyce. Please be more specific in your headlines.
Why are dividends "lovely" ...
and share buybacks "financial engineering"? In either case, management is returning profits to shareholders. Dividends are more direct, but incur immediate taxes, buybacks are indirect, but taxes are only assessed when you sell.