IBM (IBM) is raising its EPS by buying back $12.3 billion worth of its undervalued shares. That’s a lot of shares it’s taking out of circulation. But with the cost of borrowing so low, the company feels it’s the best use of its ability to borrow huge sums at near-zero costs. You’ll find the technical details of how this works below. Normally, I prefer dividend hikes than buyback programs. Dividends give you cash in your pocket. And buybacks are a too-easy way to raise profits per share which trigger stock options for the high-level company executives. But in this case it makes too much sense to pass up. From FT Alphaville…
The latest corporation looking to take advantage of the yawning gap between earnings yields and (after tax) debt yields is IBM.
Via Reuters:
“IBM SAYS AUTHORIZED $10 BILLION IN ADDITIONAL FUNDS FOR USE IN THE COMPANY’S STOCK REPURCHASE PROGRAM
IBM – AMOUNT IS IN ADDITION TO APPROXIMATELY $2.3 BILLION REMAINING AT THE END OF SEPTEMBER 2010 FROM A PRIOR AUTHORIZATION
IBM SETS REGULAR QUARTERLY CASH DIVIDEND OF $0.65/SHR”
And Merrrill Lynch strategist Jeffrey Rosenberg reckons there’s plenty more where that has come from (emphasis ours).
“Only two years removed from the greatest financial crisis since the depression this surprising outlook arises out of a confluence of events. The global monetary response to the credit crisis of zero interest rates and quantitative easing pushes the cost of debt to historic lows. At the same time, investor portfolio preferences shifted post crisis towards debt and away from equities.
“The result: the largest gap between earnings yields and (after tax) debt yields. That means investors overvalue debt and undervalue equity. And the coming corporate finance response means issuers have historic incentive to sell the overvalued portion of their capital structure (debt) to buy back the undervalued (equity). The gap in valuation relative to history suggests a potential 50% increase in debt funded buyback activity over the next year.”
Look for IBM’s shares to perform better than the market just on its huge buyback program alone. That makes the company a pretty good investment at this point.
