IBM Stock Buyback, What Are They Thinking?

| About: International Business (IBM)

This is idiotic:

Oct. 26 (Bloomberg) -- International Business Machines Corp., the world’s biggest computer-services provider, said its board today authorized $10 billion of stock repurchases.

The move brings the amount of money authorized for buybacks to $12.3 billion, the Armonk, New York-based company said today in a statement. In April, IBM authorized $8 billion in stock repurchases.

This is about 7% of their float in aggregate.

Why is it stupid? Because a buyback says two things:

  • Our stock is trading historically cheap to value.
  • We can't find anything we can spend our corporate cash on that will grow the business prospects - that is, we are unable to find a way to expand sales with our money in a fashion that will return at least the margin that we earn now.

That latter statement is not good.

Now there's justification for a buyback when your stock is trading at or near historical lows. But the danger with buybacks is that by reducing the denominator you are levering up your equity - that is, while the EPS goes up for each dollar earned (since the denominator is smaller) so do losses, if they occur, for the same reason.

When you have a company with a chart that looks like this:

This move smells like a desperation move to keep EPS where it is (or "meet expectations") into declining actual earnings in nominal dollar terms.

Disclosure: This turd will flush and when it does, I'm going to sit on the handle to make sure it doesn't get stuck.