The IBM Buyback

         As reported yesterday, the International Business Machines Corp. (IBM) board has increased the company stock buyback program to a total of $20.6 billion, around 10% of market capitalization (common stock outstanding times market price) at the time of the announcement.  From the rest of the news coverage, which dubbed this "financial engineering" (as opposed to the enlightened, cutting edge, and totally appropriate financing it really is), MacDougal got to wondering if anybody in the media had any idea what the announcement meant, and figured it wouldn’t hurt to dig into that for our valued subscribers, a number of whom are at least as accomplished in arithmetic as he is.

         First of all, will IBM repurchase 10% of its shares? In that case, intrinsic value, as measured by whatever relationship to book value you want to use, would rise by 11.1%.  (After subtracting 10%, our new intrinsic value denominator is to 9 as our old denominator was to 10, and 1/9=11.1%).  If you think the market will let Big Blue pull it off, go ahead and factor that increase into what you've been figuring IBM is worth, and do so today.

         Beyond this, it’s clear that there will be more repurchases if market prices remain low enough.  What if IBM were able to retire 5% of the issue every year?  That would be $10 billion per annum, and the rate isn’t a stretch, given buybacks in recent years as well as the gloomy global economic outlook, which could put a lid on quotes for a while.  Or, what if, which is more likely, Big Blue came up with a way of mixing stock repurchases in with normal bottom line growth, as warranted?

         To get those answers, we peer into the future, focusing on what impact the new math would have on calculations discounting future earnings per share (EPS) growth.  A PE analysis, comparing such a projection with a stock’s ratio of market price to EPS, is representative of what you’d want to use there, and investors are familiar with the concept, so lets go with it for our purpose here.

         Doing the grunt work, McDougal found that reducing shares by 5% a year with no increases at all in annual net income would hike EPS slightly faster than management could by growing annual net income by 5% per annum without stock repurchases.  EPS would double in the 14^th year under such a permanent share repurchase program and increase by eightfold in the 41^st year, versus the 15^th and 43d year, respectively, resulting from 5% annual EPS growth.

         Furthermore, because you buy back fewer shares each year under this program, even with no net income growth IBM would generate enough cash to purchase 5% of its shares a year indefinitely as long as the PE ratio remained at, say, 11.5x or lower, a distinct possibility under the conditions we’re working with.  However, were market valuations to improve, Big Blue couldn’t afford to maintain a 5% per repurchase program if the PE rose too high, and it looks like that point would be reached somewhere before the PE hit 15.

         Interestingly, the PE relationships wouldn’t change a whole lot if IBM were to do both, that is, grow EPS at 5% and repurchase 5% of its shares every year, but EPS would double in the 7^th year under that assumption, reflecting a 10.5% annual growth rate.  Higher earnings growth would have to eventually increase the PE multiple, the market driving IBM’s PE through 15 at some point.  Given management’s firm commitment to "financial engineering", stock buybacks would probably continue at an appropriately reduced level in that event.

         So, subscribers, change your valuations accordingly, upping the intrinsic and adding your annual stock repurchase estimates directly in with net income growth projections - for as long as IBM’s PE multiple hangs in at current levels.  If the price shoots up, wait to hear what the Board has to say, and recalculate.  

         It's noteworthy that MacDougal made no provision for an earnings dip in his assumptions, so within the constraints of his work, stock repurchases appear to establish a floor for EPS growth of 5% a year.  If earnings were to show signs of chronic decline, that outlook would have to be cranked in anew.

Dylan Ratigan: Lone Voice of Truth in the Media

   

Our valued subscribers send us great stuff from time to time.  Here’s the latest:

http://www.youtube.com/watch?v=RHVxhcTLGEE

Financial Racketeers Cut Government In

         In the largest single bribe on record in the history of rigged-market nepotism, the Umama Administration announced over the weekend that Fallutin National has agreed to a tentative settlement that pays Washington $13 billion to make various civil charges go away.  The criminal enterprise has already spent a reported $22 billion since 2008 on an estimated 18 federal, state and overseas probes and has reserved an additional $23 billion for litigation expenses, $6 billion shy of their worst-case scenario.

         A figure close to $50 billion would represent something around a 25% hit to Fallutin shareholders, as their equity came in a bit over $200 Billion on the third quarter books, though factoring in the tax effect could reduce that percentage impact significantly by the time all gets said and done.  (Given the sheltering options in today's global environment, calculating after-tax pro-forma anything is a fool's errand, at best, so we can't help you with a number there).

         The settlement covers conduct leading to the Financial Apocalypse that devastated the civilized world and Iceland half a decade ago, and leaves prosecution of individuals on the table.  So far responsibility for the economic End of Days and its ongoing aftermath has been placed on the shoulders of a single Frenchman, Fabulous Fab at Goldberg Styx, and after so many years of waiting, many observers find it hard to believe that anybody else will ever get fingered for anything.

         Even Fab wasn’t criminally charged, so technically nobody has ever been held accountable.

         Elsewhere, internet media outlets report that China has intensified its investigations into the corrupt practices of US corporations operating in that country.

         Jeeze, we wonder why.

Inside Joke

         “Ultimately, what matters is: what do people who are buying Treasury bills think?” Blatant Umama responded to reporters the other day, taking a backhanded jab at fiscal conservatives and anyone else who sees Big Brother’s power grab over the free market system as unconscionable.

         The people actually buying Treasury bills today being Ben Bananas, Chairman of the Board of Governors of the Federal Reserve System (FED), Hy Jintao, the Dang He Guojia Zuigao Fingdaoren of the Peoples Republic of China (PRC), and Shinzo Abe, the Naikaku-Sori-Daijin of Japan (JAP), egregious price-rigging by these three conspirators means that everyone else in the marketplace has become a victim of their colossal swindle, not a buyer.  Returns of .02% on 13 week paper or .10% on the 52 week rape investors who rely on those instruments for income, or used to, like many of us.

         Federal spending has run amok.  A free market would hold those &%^$$#% politicians responsible, driving interest rates sky high, until every last culprit got tossed out of office by the voters.  This way, thanks to the FED, the PRC, and the JAP,  Washington sleazebags continue to reign over a runaway catastrophe.

         The PRC is simply paying Washington off for handing them our “outsourced” jobs, the JAP has to make sure the American auto industry that their exchange rate manipulation destroyed so many dark eons ago continues to remain destroyed, and Ben Bananas is doing what he must in order to keep his pathetic loser buddies firmly entrenched inside the beltway.

         Umama rubbing our collective nose in it must come off as hilarious within those smoke-filled rooms on Pennsylvania Avenue.  It strikes us, however, as further urgent grounds for immediate impeachment.

Graphene

        When we were starting out, aluminum was considered the metal of tomorrow, expanding its use in an impressive array of products, aircraft frames and beverage containers notable among them.  Sea changes in that outlook languished Alcoa right out of the Dow Jones Industrial Average last month, and it’s been brought to our attention that something called graphene may have already emerged as the new titleholder.

        Nothing that aluminum has been replaced with is considered a metal, so what that title may be is the subject of some debate.  Allotrope of the future maybe, if the titleholder even turns out to be graphene, or free-standing single atomic plane of tomorrow.  There is also the occasional reference to chicken wire that would seem to offer intriguing definitional possibilities.

Whatever, this stuff is 100 times stronger than steel, ridiculously light, supermodel thin, and easy to layer, has the optical properties of a TV screen, and conducts electricity well enough to possibly be the next hot way to reduce computer thingie sizes.  A single thread of graphene the size of a cat’s whisker can lift an automobile right off the ground, while the car's side panels show you Fox News too, we suppose.

        And a box of graphene oxide membranes can distill vodka better than anything, reason enough for MacDougal Post subscribers to check all this out at the following links (Careful, the first is for science jocks only):

http://en.wikipedia.org/wiki/Graphene

http://www.graphene-info.com/companies

http://investingraphene.com