Annex Newsflash 2005-18 May 4, 2005
Updated 5/14/05, 12:45 PM PDT (adds "IBM, Dell charts")
Analysis of New Stock Buyback Trends
The Phantom Is Back
After a Three-year Lull, Stock Buybacks Are Soaring Again, Spurred by IBM's and Other IT Industry Leaders' Spending
PHOENIX, May 4 – Like an orchestra directed by the Phantom of the Opera's invisible hand, the nation's largest companies went on a spending binge in 1995. They started buying themselves. In droves. Ten years later, the stock buybacks are booming once again. In the fourth quarter of 2004, for example, the Federal Reserve Board's funds flow data show that non-financial corporations acquired about $395 billion in equity on an annualized basis. That's nearly a six-fold increase over the fourth quarter of 2003 (see the chart).
The Standard & Poor's figures confirm this trend. The S&P 500 spent a record $66.4 billion on share repurchases in the fourth quarter of last year, 37% more than the previous high of $48.6 billion, set in the first quarter of 2000, just as the dot.com bubble was about to burst. The latest figure is also up 72% from the fourth quarter of 2003, according to S&P's April 7 release.
Perverse and Pervasive
Since 1995, the stock buybacks have morphed from "corporate cabbage patch dolls" (i.e., a fad, as we put it seven years ago), to one of the most perverse and pervasive stock market schemes in history.
Perverse, because instead of investing in new products and services, Corporate America followed the Phantom of the Casino's advice and lined Wall Street's pockets with at least $1.2 trillion of stock buybacks (see the chart).
Perverse, because the buybacks rewarded only the former shareholders at the expense of the loyal "buy and hold" ones.
Perverse, because the companies were buying back their shares by the billions as their officers were selling them by the millions or even billions in some cases (conflict of interest, anyone? - see the chart).
Perverse, because the big sellers were typically large institutional investors whose analysts would laud the company, thus boosting its stock price.
Pervasive, because hundreds of S&P companies took part in the scam, led by IBM, Intel, Microsoft and other IT industry giants. By letting others (Wall Street) invest their money, they proved that they had more cash than brains. Microsoft's July 2004 $75 billion buyback/dividend combination is a case in point.
Sadly, the IT companies led all other business sectors in this Wall Street-cooked up borsht of greed and conflict of interest. Representing about 15% of the S&P 500 market value, the IT sector accounted for 26% of the 2004 stock buybacks. Six of the top 10 companies on the S&P buyback list were IT firms.
While IBM's grip on the IT industry's and global leadership may have slipped in many categories over the years, Big Blue is still the undisputed champion of the world - in stock buybacks. During the last 10 years, the company spent over $51 billion on share repurchases, according to S&P. Based on our quarterly tracking, however, since the first quarter of 1995, IBM has spend over $60 billion on stock buybacks (see the chart).
And if the first quarter of 2005 is any indication, when the company set a new high of $3.4 billion in stock buybacks, 2005 is likely to be a new record year for IBM's throwing cash at Wall Street. So you'd think the Big Blue stock would be soaring? Think again... (see the chart).
However huge, IBM's spending on stock buybacks is eclipsed proportionately by another IT competitor's - Dell's. During the last 10 years, Dell has spent more money buying back its shares than it has earned (112% - see the chart).
IBM, on the other hand, has spent "only" 92% of its 10-year earnings on share repurchases. Whatever the percentages, and however unfair the practice, the two IT companies' actions suggest that the stock buybacks have become the new preferred way of distributing the earnings to the shareholders.
Why Sudden Resurgence?
But the buyback scheme is no longer working so well. Like IBM, scores of companies have been buying scads of their own shares without getting the benefit of higher stock prices in return, as they used to in the early years of this trend (IBM, Microsoft, Dell, HP... are among the cases in point - see "An Upside-Down View," Mar 2005).
Furthermore, now that both dividends and capital gains are taxed at 15%, another reason to prefer buybacks has been eliminated, notes Floyd Norris in the April 16 edition of the International Herald Tribune. Yet, last year was the first year since 2000 that companies in the S&P 500 spent more on buybacks than they did on dividends.
Illogical? Yes. Mysterious? Yes. Crafty? Probably. Unsavory? Maybe. All of the above? Definitely.
For, it is truly a mystery why suddenly there has been a sudden big resurgence in stock buybacks. Evidently Wall Street and its clients know something we don't. Just what that is - is anybody's guess.
But there is no doubt that the Phantom of the Wall Street Casino is back, and that the corporate musicians are once again playing his tunes his way - with gusto and blissful abandon.
Happy bargain hunting!
 The $1.2 trillion figure comes from a Standard & Poor's April 7 release. The actual number American corporations spent on stock buybacks is probably much higher when one considers thousands of other companies that are not a part of the S&P 500.
For additional Annex Research reports, check out...
2005 IT: Stock Buybacks: The Phantom Is Back (May 2005); EDS Misfiring on All Cylinders (May 2005); HP Surges, Dell Slumps; Lenovo Completes IBM Deal (May 2005); Capgemini Jettisons Healthcare in N.A. (Apr 2005); HP: From India to Poland (Apr 2005); IBM: Slammed and Dunked (Apr 2005); Accenture: Roaring Ahead (Apr 2005); Fujitsu Unveils New Servers (Mar 2005); EDS Executive Suite; HP's New CEO (Mar 2005); An iSeries Revival (Mar 2005); EDS Booster Club Fees Rise (Mar 2005); An Upside-Down View (Mar 2005); The Worst of Both Worlds (Mar 2005); Octathlon 2005: Accenture Wins (Mar 2005); IBM Global Services: Smaller, Shorter - Better? (Mar 2005); IBM 5-yr Forecast: Quality over Quantity (Mar 2005); IBM PC Deal Okayed (Mar 10, 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005); IBM Servers to Grow Again (Feb 2005); Carly's Fickle Fans (Feb 2005); CSC: Gearing Down on Purpose (Feb 2005); EDS: Grossly Overpriced Stock (Feb 2005); IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)
2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004); IBM Server Renaissance (Nov 2004); HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004); To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)