A couple years before he left IBM in 2012 to ponder the many ways he might spend his $100M+ retirement compensation package, Chairman and CEO Sam Palmisano laid down a bold prediction (guarantee, actually, ala. Joe Namath before Super Bowl III): that by 2015, IBM would generate earnings per share (EPS) of $20. Palmisano was confident. After all, he had made a similar prediction in 2005 that EPS in 2010 would be $10 – and through decent earnings growth and a dash of financial engineering, the company achieved the goal.
So how did IBM do in the years 2010 to 2015? Here’s a hint: late in 2014, current IBM CEO Ginni Rometty ditched the $20 goal – after concluding that it was mathematically impossible to achieve. Sort of like being behind by five touchdowns at the two minute warning: you just walk off the field and contemplate the next game – or perhaps consider taking up a new sport altogether.
IBM’s EPS for 2015 is expected to come in at $14.75, missing the once-sacrosanct goal by more than 25 percent. Funny, though. While IBM was pilloried for abandoning the goal, I suspect most companies would kill for an EPS this high. Hewlett Packard delivers less than $3, Boeing is about $7.50, even the vaunted Apple hovers in the $3 range. And Facebook, darling of Wall Street? The analyst consensus on EPS for fourth quarter 2015 is 50 – cents, that is.
The theory goes that investors love high EPS, as it shows the company is delivering value to the shareholders. And therefore, high EPS will lead to increased stock price. So how has IBM stock done since 2010? Not so well. The price actually trades lower today – $122 – than it did five years ago when the mandate to make $20 EPS (known as “Roadmap to 2015”) was first articulated. Does this somehow suggest earnings per share doesn’t mean as much to investors as some think? I would say “yes.”
As a ratio, EPS takes earnings and divides by the number of shares outstanding. EPS goes up when earnings go up, number of shares goes down, or a combination of both. Clearly, everyone loves rising earnings (unless you’re a short seller). Not so clear is whether everyone, or even most people, loves to see the number of shares outstanding go down. That’s because the method by which the number of shares is reduced is for the company itself to buy its own stock back from investors – a tactic that diverts capital away from other worthy endeavors like investing in new products and technologies, opening new plants and stores, running marketing campaigns, hiring new employees, etc.
CEOs (who personally benefit greatly when stock prices rise) will argue that buying back shares sends a message that the company is bullish on itself. Plus, overall dividend expense can be reduced. They’ll suggest that the best use of money they can think of is to repurchase shares. Investors are expected to agree which drives demand for the stock and should boost the price. However, many investors smell a different story: that the buy-backs are in reality done to engineer a better EPS. The story is especially odorous if a company, like IBM, shows ever-rising EPS without improving earnings. It’s all about the denominator – and that’s not a sign of strength for most investors.
So what were the results of IBM’s stock-buying spree since the “Roadmap to 2015” was unfolded? According to published annual reports, IBM bought back about 335 million shares since 2010, spending $74.3 billion. A good chunk of the $74.3 billion was borrowed. And no doubt many people lost their jobs in layoffs so that share buybacks could happen.
Today those 335 million shares are worth $41 billion – $30 billion less than what IBM paid for them. Thanks to Palmisano’s blurry vision, IBM went through years of warped decision-making in a futile attempt to make a number few people care that much about. And in the process, the company got taken to cleaners. If there were such a thing as “squanders per share,” IBM’s SPS would be about $33. Now that’s what you might call “Roadkill to 2015.”
Now That’s Rich
“National Review,” a magazine for conservatives, recently came out strong against Donald Trump. Essentially their claim is that he’s unmoored, petulant, and most egregiously, not conservative. In the editorial hit-job of January 21, the magazine noted with disdain, “His obsession is with ‘winning,’ regardless of the means — a spirit that is anathema to the ordered liberty that conservatives hold dear and that depends for its preservation on limits on government power.”
Taking issue with winning regardless of the means? Now that’s rich. This from a group that:
- Promotes “voter registration” hurdles to ostensibly prevent fraud, when in fact it’s all about keeping legitimate voters from casting ballots for Democrats.
- Cheered a conservative Supreme Court in Bush v Gore that shut down the recount process three days before the legal deadline, handing the victory to President-Select Bush.
- Sees no issue with cronyism, as long as they win. Example: being comfortable with the Florida Secretary of State, who is in charge of certifying election results, also being George Bush’s election chairman in that state.
- Supports naked gerrymandering such that, for example, in Pennsylvania , Democrats cast 50.5 percent of the votes for Congress in 2012 and wound up with 28 percent of the seats.
That “National Review” – almost as funny as Adam Sandler.