IBM: Stock Buybacks Gone Wrong?

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TJSI
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IBM: Stock Buybacks Gone Wrong?

Post by TJSI » Tue Oct 21, 2014 8:17 pm

There is an interesting article in today's NYT (The Truth Hidden BY IBM's Buybacks) about a much discussed and debated topic---Buybacks.

The article points out that since 2000 IBM has spent $108 billion on buybacks while investing $59 billion on capital expenditures and $39 billion on acquisitions. Dividends during that period were $30 billion.

IBM is having a difficult time growing revenue and earnings. Buybacks can't hold up the stock price. And it seems likely that the money spent on buybacks would have been better spent on other investments than itself.

They may well end up a great business case of when not to do buybacks.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by stlutz » Tue Oct 21, 2014 8:26 pm

Remember that a buyback is just another way to pay a dividend.

Why do you think that IBM management would have made better investments with those profits than their shareholders would have? At the end of the day I trust investors to allocate capital more than I trust managers to.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Boglegrappler » Tue Oct 21, 2014 8:39 pm

Nothing at all wrong with buying back your stock. It depends on your alternative investments, internally and externally.

Its not usually done to prop the stock price up directly. Indirectly this happens because if done properly it increases earnings per share over time.

My favorite quote on buybacks came after the '87 crash, when a number of companies instituted them....at least by authorizing it at the board level. WSJ asked one CEO why he wasn't interested in doing a buy back and he replied "Well, I've never heard of a company going out of business because its stock price was too low, but I've heard of companies going out of business because they ran out of cash."

TJSI
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Re: IBM: Stock Buybacks Gone Wrong?

Post by TJSI » Tue Oct 21, 2014 8:55 pm

Stlutz,

Well I don't believe a buyback is a dividend, or a form of dividends , or like a dividend. It is an investment.

IBM has a great history as a technology company. They have weathered several technology changes and their stockholders have benefitted greatly. It looks like somewhere along the way lately, they decided that they could no longer grow with internal investing.

Buybacks are often a sign that the days of even moderate growth are over.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Tue Oct 21, 2014 8:58 pm

TJSI wrote:Buybacks are often a sign that the days of even moderate growth are over.


The same can often be said for the institution and large increases of dividends.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by nisiprius » Tue Oct 21, 2014 9:01 pm

Anyone interested in IBM should read Robert X. Cringely's searing, scathing, lacerating, brutal, blistering, excoriating critique, The Decline and Fall of IBM. See the introduction here to get the idea. According to Cringely, Wall Street is just beginning to realize that IBM is in trouble, and according to him buybacks are part of the problem; not buybacks as such, but a decision to focus the company on the goal of reaching earnings of $20 per share by 2015. According to Cringely, "Customers no longer trust IBM to manage projects well, get the projects finished, or have the projects work as promised."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Tue Oct 21, 2014 9:05 pm

Boglegrappler wrote:Nothing at all wrong with buying back your stock. It depends on your alternative investments, internally and externally.
Its not usually done to prop the stock price up directly. Indirectly this happens because if done properly it increases earnings per share over time.


Why is it done at all if not at least as an attempt to prop up the stock price ?
EPS will indeed increase if E is stable and S decreases. Thus share price should in theory increase. But it might not do so as much as intended, if growth or outlook are negative or bad.

There are all kinds of incentives for companies to prop up their stock prices. One is to pay extra executive compensation by making employee stock options more valuable. Others include meeting guidelines for listings on certain exchanges, to remain part of certain indices. Others are to prevent takeovers.

My favorite quote on buybacks came after the '87 crash, when a number of companies instituted them....at least by authorizing it at the board level. WSJ asked one CEO why he wasn't interested in doing a buy back and he replied "Well, I've never heard of a company going out of business because its stock price was too low, but I've heard of companies going out of business because they ran out of cash."


Well, the company might not go out of business, but if the stock price drops towards $0, the stock will get delisted. Or the company will be acquired for chump change and effectively cease to exist. And the executives and the board don't want that to happen.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by nisiprius » Tue Oct 21, 2014 9:13 pm

Companies can also go out of business if "Customers no longer trust [them] to manage projects well, get the projects finished, or have the projects work as promised." That part of it matters, too. Yes, really, it does.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Tue Oct 21, 2014 9:15 pm

nisiprius wrote:Companies can also go out of business if "Customers no longer trust [them] to manage projects well, get the projects finished, or have the projects work as promised." That part of it matters, too. Yes, really, it does.


Absolutely, but I'm not sure stock buybacks are directly responsible for that.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Calm Man » Tue Oct 21, 2014 9:21 pm

Kodak. Xerox. IBM now probably. I simply have no clue what IBM has to offer any more that other more nimble companies do. I am unaware that I now have any products or services related to IBM or any of the businesses I work with. I see Dell or Lenovo computers, Microsoft office products, google drives and everybody with iphones or androids. Although hard to believe, this company can wither away. It looks like the "Buffet companies" are in big trouble. Coke is another... Syrup only goes so far (or water).

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Re: IBM: Stock Buybacks Gone Wrong?

Post by nisiprius » Tue Oct 21, 2014 9:38 pm

madbrain wrote:
nisiprius wrote:Companies can also go out of business if "Customers no longer trust [them] to manage projects well, get the projects finished, or have the projects work as promised." That part of it matters, too. Yes, really, it does.
Absolutely, but I'm not sure stock buybacks are directly responsible for that.
Read Cringely's book. As I understand it, Cringely is saying that buybacks didn't cause it, but the mentality that focussed on raising earnings to $20/share to the exclusion of everything else assuredly did.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by bru » Tue Oct 21, 2014 9:53 pm

So I should sell my IBM stock? And take my profit?

A quick search shows IBM beating the S&P over the last 10 years. Even with its recent fall.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Langkawi » Tue Oct 21, 2014 9:58 pm

TJSI wrote:Well I don't believe a buyback is a dividend, or a form of dividends , or like a dividend. It is an investment.

You are certainly entitled to your beliefs. However, if you wish to align your beliefs with facts, you may find this lecture by Aswath Damodaran to be useful.
http://youtu.be/f8UMSWAihnc

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Re: IBM: Stock Buybacks Gone Wrong?

Post by bhsince87 » Tue Oct 21, 2014 9:58 pm

I don't see how it could be argued that it's not been successful for the past 5-10 years.

But now what?
BH87

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Rob5TCP » Tue Oct 21, 2014 10:01 pm

When I first started in computers there was a saying: no one ever got fired for buying from IBM. Selling compatibles to IBM
that phrase was the worst. We had better value, integration, hardware and so on. Yet, they still went with IBM.

Today that phrase is a joke.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Tue Oct 21, 2014 10:01 pm

nisiprius wrote:Read Cringely's book. As I understand it, Cringely is saying that buybacks didn't cause it, but the mentality that focussed on raising earnings to $20/share to the exclusion of everything else assuredly did.


I will, the book seems interesting.

I almost worked for IBM in the mid to late 1990s. I'm somewhat glad that didn't happen. I know many people who worked there and have been very disenchanted with the company.

Maybe the current management will figure out what to do, but it takes a very long time to sail a ship as big as IBM.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Tue Oct 21, 2014 10:02 pm

bru wrote:So I should sell my IBM stock? And take my profit?

A quick search shows IBM beating the S&P over the last 10 years. Even with its recent fall.


"Past performance is no guarantee of future results".

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Boglegrappler » Tue Oct 21, 2014 10:18 pm

Companies can also go out of business if "Customers no longer trust [them] to manage projects well, get the projects finished, or have the projects work as promised." That part of it matters, too. Yes, really, it does.


Agreed. And when that happens, they run out of cash.

I haven't read the book but I agree that a company can go wrong focusing on the bottom line eps specifically instead of their products and services and customer franchise. That's all you have in business.

A look at the financials over the past 4-5 years shows a no/low growth company, but at 10x earnings its valued that way.

I frankly don't think the company's buying of stock over the past four years has had much impact on the stock price other than the accretion in eps. There are rules about how companies are permitted to buy back stock that effectively keep the company from goosing it.

Buying back stock is the equivalent of having a private company with a handful of owners vote to buy out one of the owners using the company's cash. Its the same thing. You do it because you think you are increasing value for the remaining shareholders. Not everything is market manipulation, :D

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Re: IBM: Stock Buybacks Gone Wrong?

Post by mjb » Tue Oct 21, 2014 10:38 pm

Several business instructors I had said, "If the only way a CEO can add value to a stock is through buybacks, it is time to get a new CEO.". The same thing is said for raises dividends much faster than revenue/profit growth. One worked at IBM for decades.

I want companies that continually grow and that requires capital investment, R&D, marketing, and usually employee expansion. I only want to see buybacks and dividend increases if a) the company's cash base is growing faster than revenue and profits, b) the stock price is low relative to fundamentals, c- the payout ration is less than 60%. This also makes indexing more efficient as this smooth out stock valuations.

For the past decade, capital expenditures and R&D have been at historic lows relative to GDP and our long term growth is suffering.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by TJSI » Tue Oct 21, 2014 10:44 pm

Langhhawi,

I suggest you read the latest comments from the good professor on buybacks v dividends. See: Musings on Markets, Sept 22, 2014 Stock Buybacks: They are big, they are back & they scare some people.

He refers to them as a type of "return" not a dividend.

Buybacks are investments. They may give a positive return; however, they can also give a negative return if the company is overpaying for the stock.

And as someone once said: That fact has the added advantage of being correct.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Pizzasteve510 » Wed Oct 22, 2014 12:43 am

My worry is that these strategies do not impose adjustments to executive options designed to be compensation for growth. All options should be repriced when these strategies are approved (IMHO). Earnings growth is meant to trigger executive comp via options, not balance sheet stripping used to artificially push up nominal stock prices.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by ogd » Wed Oct 22, 2014 1:07 am

TJSI wrote:Buybacks are investments. They may give a positive return; however, they can also give a negative return if the company is overpaying for the stock.

Stock buybacks are money paid to shareholders. They are very much like dividends that you might take optionally at capital gains rates, or reinvest without paying taxes, or anything inbetween. Like so: on the day of the buyback, separate out for inspection the percentage of stock that matches the buyback, then of that sell the part you want cash for, keep the part you want to reinvest. Your equity % in the company will be the same as if a dividend had been paid and you had made the similar dividend decision. Your equity in Uncle Sam will be a little smaller.

The true arguments against buybacks are: 1) that they might be influenced by executive compensation, and 2) that the default position is "reinvest everything" and it's hard to monitor the company and actually "take" the dividends.

1) might be big one for some companies. Who knows. All I know if once I made the decision to leave 95% of my investment with a bunch of executive "crooks", it doesn't make much sense to worry about the other 5%. It's either in good hands, or gone.

2) I'm in the accumulating stage and I'm reinvesting all dividends anyway. So I don't need the capability to take them. If I never saw another dividend for 30 years, I'd be happy.

Don't blame buybacks for IBM's troubles. They are a dinosaur. I've had the opportunity to get a fairly close look, and I'm still shaking my head.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by inbox788 » Wed Oct 22, 2014 1:10 am

TJSI wrote:There is an interesting article in today's NYT (The Truth Hidden BY IBM's Buybacks) about a much discussed and debated topic---Buybacks.

The article points out that since 2000 IBM has spent $108 billion on buybacks while investing $59 billion on capital expenditures and $39 billion on acquisitions. Dividends during that period were $30 billion.

IBM is having a difficult time growing revenue and earnings. Buybacks can't hold up the stock price. And it seems likely that the money spent on buybacks would have been better spent on other investments than itself.

They may well end up a great business case of when not to do buybacks.

If they've been consistently buying back heir stock, much of it was bought for less than $100 a share, and the average price of all he stock bought is probably still lower than the current stock price. Analogous to dollar cost averaging. Plus they've been collecting all the dividends instead of paying it out on all the stock bought back.
The question whether they got a good ROI on the capital expenditures and acquisitions. Note that any additional capital expenditures and acquisitions would have been lower quality with lower expected returns and would take additional management time, attention and costs. They could have squandered it on lesser companies than IBM itself. Would they have done any better buying HP or Dell instead of divesting their PC division to Lenovo? Or buying up Cray, NCR, Palm or Xerox? Blackberry?

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Re: IBM: Stock Buybacks Gone Wrong?

Post by TJSI » Wed Oct 22, 2014 2:06 am

inbox788,

Since they have been consistently doing buybacks, they must have concluded that their stock was consistently undervalued for more than a decade and was always a good investment. They were probably right some of the time but I suspect that there were other motives at work.

That is some list of alternative investments you present for them! I guess they had no choice but to buy IBM stock. Maybe they should have bought Apple stock instead?

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Wed Oct 22, 2014 3:23 am

TJSI wrote:Since they have been consistently doing buybacks, they must have concluded that their stock was consistently undervalued for more than a decade and was always a good investment. They were probably right some of the time but I suspect that there were other motives at work.


It would be surprising if the board of IBM thought their own stock ever was a bad investment. They have a vested interest in thinking that way.

They may have been right in the past, but may no be longer right. And what are they going to do if IBM ends up cash poor ? Issue more shares to get cash ?

Buying back their own stock took away the flexibility they had with a lower stock price / lower EPS.
If they bought other assets with the cash, they might now be able to divest them/spin them off. Maybe even make a profit in doing so.
Instead, they are paying people to divest some of their assets right now (Global foundries).

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Valuethinker » Wed Oct 22, 2014 3:58 am

When companies announce significant acquisitions the share price of the acquirer usually goes down.

McKinsey tracked a large database of acquisitions, and found that only about 1/3 created a positive shareholder return (for the acquirer) and that the initial reaction of the stock market (to mark the stock down) was usually a strong and continuing signal of the final loss to shareholder value.

KPMG similarly estimated about 27% of acquisitions added value for shareholders.

Investors know these odds- -they have read the research. The have therefore a strong bias for companies to pay out surplus cash via dividends and buybacks, rather than retaining it internally.

Generally they are (at least in theory) indifferent between buybacks and dividends. The dividend puzzle is why companies bother to pay dividends at all, given the tax issues in so doing (we have discussed this at length in another thread). Warren Buffett uses buybacks but not dividends.

The corporate governance problem comes if management is highly incentivized by the stock price or EPS: then it's better to buy back shares than pay dividends, and a company could conceptually overdistribute to reward management.

The extreme form is the Leveraged Buy Out where by using large levels of debt, a company makes a one off distribution to shareholders: in acquiring the company and at exit. Debt is held to have very strong governance attributes: there's no risk the company will have excess free cash flow to squander.

A good case of all this is Sealed Air, which used buybacks to provoke a 'crisis' within the firm and greater operational efficiency. You can download the HBS case on this one.

Best academic sources on all this are Michael Jensen and Karen Wruck: the Free Cash Flow Theory of the Firm - lots of research and debate.

http://student.bus.olemiss.edu/files/fu ... yerscs.pdf

https://www.aeaweb.org/articles.php?doi ... jep.2.1.21

http://pages.stern.nyu.edu/~adamodar/Ne ... evance.htm

http://webpage.pace.edu/pviswanath/note ... tml#chap18

http://webpage.pace.edu/pviswanath/note ... tml#chap20

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Valuethinker » Wed Oct 22, 2014 4:01 am

TJSI wrote:inbox788,

Since they have been consistently doing buybacks, they must have concluded that their stock was consistently undervalued for more than a decade and was always a good investment. They were probably right some of the time but I suspect that there were other motives at work.

That is some list of alternative investments you present for them! I guess they had no choice but to buy IBM stock. Maybe they should have bought Apple stock instead?



OR they thought they had more cash than they needed for acquisitions + internal investments.

If the excess cashflow was periodic/ repeated then they should pay a steady and increasing dividend.

If it was 'one offs' arising from periods of competitive superiority (now being eroded by market forces) then buybacks or special dividends are a way of doing this: the preference determined by factors such as taxes. Generally special dividends will not raise the share price, whereas buybacks will.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Valuethinker » Wed Oct 22, 2014 4:07 am

mjb wrote:Several business instructors I had said, "If the only way a CEO can add value to a stock is through buybacks, it is time to get a new CEO.". The same thing is said for raises dividends much faster than revenue/profit growth. One worked at IBM for decades.


They were not corporate finance professors ;-).

I want companies that continually grow and that requires capital investment, R&D, marketing, and usually employee expansion. I only want to see buybacks and dividend increases if a) the company's cash base is growing faster than revenue and profits, b) the stock price is low relative to fundamentals, c- the payout ration is less than 60%. This also makes indexing more efficient as this smooth out stock valuations.

For the past decade, capital expenditures and R&D have been at historic lows relative to GDP and our long term growth is suffering.


Hotly debated. Andrew Smithers thinks that, to be sure. Many economists see it as a sign of greater economic efficiency: letting the free capital markets (shareholders) allocate capital, rather than managements (who have a poor record, in aggregate, of reinvestment of free cash flows into acquisitions and investments).

Consider the world mining industry. Are shareholders happy that they have invested record amounts in new mines in the last 10 years? Since the big miners are cutting capex aggressively right now, and the share prices are in the dumps, I doubt it. Consider Rio Tinto. Acquisition of Alcan ($48bn) a disaster. Mine in Mozambique they can't get the output out (didn't get proper transport permits): risk of multi billion dollar writeoff.

Do large acquisitions work for tech cos? Maybe Oracle (but the share price hasn't been a great performer). Microsoft, Google etc. have been much more cautious with acquisitions despite prodigious Free Cash Flow (although they have made them: Motorola. Nokia etc.).

The market is not in love with Apple's acquisitions (Dr Dre?). Time will tell if they are good ones. Ebay did make money with Paypal but for strategic reasons are now spinning it off.

HP has blown its face off with acquisitions. Autonomy anyone? Was it just fraud that steered them to that writeoff?

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Wed Oct 22, 2014 5:25 am

Valuethinker wrote:Do large acquisitions work for tech cos?


Having been working a couple of decades at large tech cos in Silicon Valley, and witness the integration process of many acquisitions, I would say that overall, they are very challenging. Best case, the acquirer will take advantage of part of the technology/people they bought, and maybe spin off the unneeded/overlap parts of the acquisitions.

But oftentimes, there are some very misguided integration efforts. Some parts just don't integrate well. This is not always predictable. But it often leads to big writeoffs, and layoffs, ie. much of the original value of the acquired company is just destroyed; rather than spinoffs.

If anything, from what I have seen, the acquirers often take too long on deciding on the parts of the businesses they acquire that they should spin off or shed, and the ones they really want to integrate that have a meaningful shot at doing so.

I don't want to name too many names or go too much into specifics, because I have worked at many of the companies discussed in this thread, and still work for one of them.
If you google "worst corporate mergers of all times", I have been through one that will probably be in the history books after all the Bogleheads currently alive pass away.
Maybe after I take my early retirement, I will write a book like Cringely did on IBM ;) Some of the companies might no longer exist by then, though.

For now, I will just say that, in all acquisitions, it depends on the price you pay. If you are buying a company that's on sale, then the acquirer has much more margin for error. And it's obviously much more difficult to acquire and merge, than just acquire and mostly leave the company alone, like, say, Buffett usually does with Berkshire.

To get back to IBM, I was really surprised when it was announced that Buffett would take a large position in IBM . He has said before that he doesn't understand tech, and that he doesn't invest in what he doesn't understand . So, that seemed to be a bit of a departure from the usual for him.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by lazyday » Wed Oct 22, 2014 5:37 am

If IBM can't find productive ways to spend its money, isn't it better to return it to shareholders with dividends and buybacks?

Better than taking on projects with low expected return. Or worse, overpriced acquisitions. Some drug companies have a habit of buying other companies at large premium. Does facebook serve shareholders well by paying billions for companies with little or no profit?

Maybe google has it right, finding lots of moonshots to invest in, at a time most companies are holding wallets tight. Maybe they are turning shareholder assets into charity, trying to make the world a better place with little regard for monetary return.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Valuethinker » Wed Oct 22, 2014 6:10 am

madbrain wrote:
Valuethinker wrote:Do large acquisitions work for tech cos?


Having been working a couple of decades at large tech cos in Silicon Valley, and witness the integration process of many acquisitions, I would say that overall, they are very challenging. Best case, the acquirer will take advantage of part of the technology/people they bought, and maybe spin off the unneeded/overlap parts of the acquisitions.

But oftentimes, there are some very misguided integration efforts. Some parts just don't integrate well. This is not always predictable. But it often leads to big writeoffs, and layoffs, ie. much of the original value of the acquired company is just destroyed; rather than spinoffs.

If anything, from what I have seen, the acquirers often take too long on deciding on the parts of the businesses they acquire that they should spin off or shed, and the ones they really want to integrate that have a meaningful shot at doing so.

I don't want to name too many names or go too much into specifics, because I have worked at many of the companies discussed in this thread, and still work for one of them.
If you google "worst corporate mergers of all times", I have been through one that will probably be in the history books after all the Bogleheads currently alive pass away.
Maybe after I take my early retirement, I will write a book like Cringely did on IBM ;) Some of the companies might no longer exist by then, though.

For now, I will just say that, in all acquisitions, it depends on the price you pay. If you are buying a company that's on sale, then the acquirer has much more margin for error. And it's obviously much more difficult to acquire and merge, than just acquire and mostly leave the company alone, like, say, Buffett usually does with Berkshire.

To get back to IBM, I was really surprised when it was announced that Buffett would take a large position in IBM . He has said before that he doesn't understand tech, and that he doesn't invest in what he doesn't understand . So, that seemed to be a bit of a departure from the usual for him.


Thank you for the insight.

It's easy to try to shoot down Buffett: IBM and Tesco. He has said that he has so much capital to deploy now and he is so visible that he has to pick big targets and not in any way telegraph his investments in public companies.

Doubtless he thought IBM was a good spread of businesses, some strong franchises, management attendant to shareholder value. Ditto Tesco. Ouch.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by nisiprius » Wed Oct 22, 2014 6:54 am

Cringely has some interesting things to say about Buffett, too.

For those who like to read things and pick stocks, I am absolutely NOT saying Cringely has the crystal ball, but I am saying that most of the financial writers are an echo chamber and it is quite interesting to read comments from an intelligent observer who is not part of the Wall Street culture.

I'm not ready to say "Buffett must be wrong because Cringely says so," but I think a takeaway is that whether Buffett is right or wrong as the entrepreneurial CEO of a giant corporation, what he does is something that is completely different from what you and I do when we buy stocks, and almost irrelevant--and that his criteria for buying stocks are likely to be quite different from ours.

Before quoting Cringely I'll say that his words would have sounded very strange in, say 1985 or 1996 or... I've lost count of the number of times Apple has been seriously on the ropes. Anyway, according to Cringely: Apple proves that moats are for dummies
Moats are important in business because Berkshire-Hathaway CEO Warren Buffett likes moats. He likes the businesses in which he invests to have large and defensible product or service franchises with those defenses characterized as moats. Buffett’s the guy who coined the term, in fact.

... I have a book out, you see, called The Decline and Fall of IBM, and the easiest way to criticize my book is to ask, “If you are right, Bob, and IBM is in big trouble, why does Warren Buffett have so much money invested in the company?” Since this is a column about Apple, not IBM, I’ll just say that Warren loves moats, Apple doesn’t believe in them, and — for the kinds of businesses Apple and IBM are in — Apple is right and Warren is wrong.

It’s easy to criticize Apple on moats because from the outside looking in it appears that Apple had the lead in PCs and lost it, had the lead in laser printers and lost it, had the lead in graphical workstations and lost it, had the lead in music players and saw it erode, had the lead in smart phones and lost it, had the lead in tablets and saw it erode, had the lead in video and music downloads and saw those erode, too. Apple appears to invent businesses then either lose them or watch them fade away. No moats.

If Apple had moats it would fight for market share based on price, shaving margins. If Apple had moats it would stop inventing new product categories because it would no longer have the need to invent new product categories. If Apple had moats, we’re told, it make more money.

But wait a moment, isn’t Apple already among the ten most profitable companies on Earth?...

...Moats are attractive to people who don’t have direct influence on the operations of the companies in which they invest...

[Apple likes] products and customers more than defensible franchises.

If Apple had built a moat around the Apple II would there have been a Macintosh? If they had built a moat around the Macintosh would there have been an iPod, an iPhone, or an iPad?

Would there have been an Apple Watch?

No.

Moats are for dummies.

Back to you, Warren.
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Re: IBM: Stock Buybacks Gone Wrong?

Post by l2ridehd » Wed Oct 22, 2014 7:38 am

I have read and disagree with Cringely's book. Probably the first time I have disagreed with nisiprius. There are many different reasons to do stock buy backs. One of the best ones is that you have extra cash and believe that the best ROI available is to invest in yourself. As a member of that board you know more about what the future holds for your company and see a better return than you can get by spending that cash elsewhere. I personally would prefer they focus on increasing stock price vs EPS as they do not always equal the same results. The best example I can think of that, was General Dynamics back in the 90's. Their stock was around $50 a share when they told their top 50 management that for every $10 the stock price went up, they would receive a bonus equal to their annual salary. They had a time window on it which I don't recall right now, but during that time the stock doubled. And GD became a growth engine of new business and cost savings. Yes EPS increased, but the biggest return was in market cap. For my money a much better tactic than focusing on EPS.

Now IBM. I have owned and followed IBM for many years as I worked for them for 30 years. Have owned their stock at $700 a share and at $50 a share. (after many splits) They have been in "trouble" more than once. Remember the John Akers to Lou Gerstner transition for the biggest change. They have always been able to manage through the troubled waters. They hold more patents than any other company. Their technology is almost always leading edge. Yes they have struggled moving from an all products to a products and services business, but I am confident they will survive and grow. I look at the current stock price as a buying opportunity for a longer term growth opportunity. Long term because it takes time to turn the "Queen Mary" but when IBM turns it will again provide a high return.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Valuethinker » Wed Oct 22, 2014 8:53 am

nisiprius wrote:Cringely has some interesting things to say about Buffett, too.

For those who like to read things and pick stocks, I am absolutely NOT saying Cringely has the crystal ball, but I am saying that most of the financial writers are an echo chamber and it is quite interesting to read comments from an intelligent observer who is not part of the Wall Street culture.

I'm not ready to say "Buffett must be wrong because Cringely says so," but I think a takeaway is that whether Buffett is right or wrong as the entrepreneurial CEO of a giant corporation, what he does is something that is completely different from what you and I do when we buy stocks, and almost irrelevant--and that his criteria for buying stocks are likely to be quite different from ours.

Before quoting Cringely I'll say that his words would have sounded very strange in, say 1985 or 1996 or... I've lost count of the number of times Apple has been seriously on the ropes. Anyway, according to Cringely: Apple proves that moats are for dummies
Moats are important in business because Berkshire-Hathaway CEO Warren Buffett likes moats. He likes the businesses in which he invests to have large and defensible product or service franchises with those defenses characterized as moats. Buffett’s the guy who coined the term, in fact.

... I have a book out, you see, called The Decline and Fall of IBM, and the easiest way to criticize my book is to ask, “If you are right, Bob, and IBM is in big trouble, why does Warren Buffett have so much money invested in the company?” Since this is a column about Apple, not IBM, I’ll just say that Warren loves moats, Apple doesn’t believe in them, and — for the kinds of businesses Apple and IBM are in — Apple is right and Warren is wrong.

It’s easy to criticize Apple on moats because from the outside looking in it appears that Apple had the lead in PCs and lost it, had the lead in laser printers and lost it, had the lead in graphical workstations and lost it, had the lead in music players and saw it erode, had the lead in smart phones and lost it, had the lead in tablets and saw it erode, had the lead in video and music downloads and saw those erode, too. Apple appears to invent businesses then either lose them or watch them fade away. No moats.

If Apple had moats it would fight for market share based on price, shaving margins. If Apple had moats it would stop inventing new product categories because it would no longer have the need to invent new product categories. If Apple had moats, we’re told, it make more money.

But wait a moment, isn’t Apple already among the ten most profitable companies on Earth?...

...Moats are attractive to people who don’t have direct influence on the operations of the companies in which they invest...

[Apple likes] products and customers more than defensible franchises.

If Apple had built a moat around the Apple II would there have been a Macintosh? If they had built a moat around the Macintosh would there have been an iPod, an iPhone, or an iPad?

Would there have been an Apple Watch?

No.

Moats are for dummies.

Back to you, Warren.


It's easy to mistake Buffett's long run batting average (unbelievably good) for his hit on any given ball (patchy). Buffett is the first person to draw attention to his many expensive mistakes (he actually understates, or dissembles, on some of his great successes). Remember Salomon Brothers?

Cringely nails it before he drifts off into attacking moats. Horses for courses. If you are Buffett, you can restrict your investments to industries with those moats. If you are *in* a fast changing industry like technology (or retail) there are no long term moats.

Buffett's bridge playing partner and (one of) closest friend is Bill Gates. If any company in technology (other than Google) has had a moat around it in the last 20 years it is MSFT. They make phenomenal margins on their MS Office business, and good margins on their Windows business, and not much money in their other businesses (SQL Server is a good product). They have prodigious cash flow which has funded dividends and stock buybacks.

Share price has gone flat nowhere of course.

Note Buffett never invested.

The principle of moats is a good one, but they are hard to find. And Buffett's original 'moat' business The Buffalo Evening News, he noted in the 2000 recession (or was it the 1990 one?) that the moat was filling in-- the business had ceased to be recession proof. Technology and in particular the internet has a habit of eroding barriers to entry in most businesses.

Buffett never invested much in technology. After his experience with IBM perhaps he will not chance it again.

There is always a lot more talk about what Buffett is supposed to have said than what he did say. The Collected Essays of Warren Buffett is a good remedy.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by bru » Wed Oct 22, 2014 9:12 am

madbrain wrote:
bru wrote:So I should sell my IBM stock? And take my profit?

A quick search shows IBM beating the S&P over the last 10 years. Even with its recent fall.


"Past performance is no guarantee of future results".
Brilliant response.

People are saying IBM's buyback program didn't work. Seems to me it did.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Valuethinker » Wed Oct 22, 2014 9:25 am

nisiprius wrote:Cringely has some interesting things to say about Buffett, too.

For those who like to read things and pick stocks, I am absolutely NOT saying Cringely has the crystal ball, but I am saying that most of the financial writers are an echo chamber and it is quite interesting to read comments from an intelligent observer who is not part of the Wall Street culture.

I'm not ready to say "Buffett must be wrong because Cringely says so," but I think a takeaway is that whether Buffett is right or wrong as the entrepreneurial CEO of a giant corporation, what he does is something that is completely different from what you and I do when we buy stocks, and almost irrelevant--and that his criteria for buying stocks are likely to be quite different from ours.


If Apple falls we will all remember that it had no defensible market position other than constant innovation and the creation of a vertically integrated ecosystem.

Buffett you have to look at the supply side, too. He has a vast supply of very cheap capital arising from his high credit rating Berkshire Hathaway insurance businesses.

To succeed he needs to earn a 'spread' between that cheap source of funds and how he invests it. Hence electric utilities and railways. Buffett used to say he'd never invest in a regulated industry-- now he does. The allowed return on capital is greater than his cost of capital, so he reaps an increase in value.

Netjets is another good one. There's no inherent barrier to entry in fractional jet ownership. However there are network and brand benefits. It's a growth market (embarassing for companies to own and operate their own planes). It's an underexploited market: you can keep adding planes and pilots, therefore you need a lot of capital.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by investor1 » Wed Oct 22, 2014 10:56 am

I just don't get the idea that IBM might go to $0. The 2015 plan seems to be dying down. They made a big move earlier this week to "sell" their semiconductor manufacturing business which constantly created big loses for them in years past. I think they have done nearly everything they can for the 2015 plan. There are only a couple of months left. The only other thing I can think of beyond delivering what they have been working on this past quarter/year would be to lay off under performers. Beyond that, I think they have trimmed all of the fat and done all of the work they'll do for the 2015 plan. They probably could have done better with not wasting so much money on acquisitions. They do seem to buy a lot. A lot of times, I think they buy small companies for their patents rather than products/people, but maybe I'm too ignorant to judge that.

Most of the forward looking press I've seen this year is them saying they are making a push into the cloud and social markets. They've been doing server side services and internally social products for years. I don't see this as a difficult shift for them. It seems natural. I mean, they are a bit late to the market, so they'll have to fight for market share, but they seem to have the skills to do it.

It just looks like they had a bad day on the market, so the investment porn has followed. It should probably read "Good time to buy", but then it would get no attention on this board.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by inbox788 » Wed Oct 22, 2014 1:33 pm

TJSI wrote:That is some list of alternative investments you present for them! I guess they had no choice but to buy IBM stock. Maybe they should have bought Apple stock instead?


You mean Apple should buy IBM?

IBM market cap $160B
Apple cash on hand $160B

Companies don't usually buy stock in other companies, especially competing companies, not that Apple really competes these days. Companies strategically invest in companies for other reasons, and IBM has been investing in what they thought were their best options. Anything further is either not aligned with their plan, or cost too much, so buying a competitor like EMC/VMW might make sense, but the price will be high, so poor expected return, so they partner and make the best of things alone. Are there any prime targets for IBM acquisition that you know or speculate about?

Another important aspect is the divestitures (reverse acquisition) they've done, like getting rid of PC's and servers to Lenovo, which yielded them some cash, but even paying $1.5B for GlobalFoundries to take over their fabs is the complete opposite of a merger and acquisition. It's realizing that they're not adding value to the business, and simply taking over another company can wind up costing them money. Someone else can run the business more efficiently. Besides the list I mentioned earlier, other fabs are probably not on their short list of acquisitions either.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by TJSI » Wed Oct 22, 2014 2:51 pm

inbox788,

Sorry, I don't have any recommendations for IBM. I hope they recover and continue as a mainstay of the IT industry.
Maybe the cat has a few more lives in it.

I find their strategy of shedding lines of business and doing massive buybacks interesting and peculiar. Maybe it will work--time will tell.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by FinancialDave » Wed Oct 22, 2014 2:55 pm

stlutz wrote:Remember that a buyback is just another way to pay a dividend.

Why do you think that IBM management would have made better investments with those profits than their shareholders would have? At the end of the day I trust investors to allocate capital more than I trust managers to.


Unless you are the one that sells their shares back to IBM it is NOTHING like a dividend. The company can buy back shares right up until the time it goes bankrupt and if you don't sell any of your shares you will get nothing!

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Re: IBM: Stock Buybacks Gone Wrong?

Post by ogd » Wed Oct 22, 2014 3:03 pm

FinancialDave wrote:Unless you are the one that sells their shares back to IBM it is NOTHING like a dividend. The company can buy back shares right up until the time it goes bankrupt and if you don't sell any of your shares you will get nothing!

fd

FD: see my message above. This is no different than reinvesting dividends, with the difference that "reinvest" and not "cash out" is the default position. Admittedly, you need to go through a bit of bother to match the company's actions if you want to cash out; nevertheless, you are free to sell to maintain the same % ownership like a dividend-spender does, whereas the dividend-reinvestor in the other scenario is not free to avoid paying taxes to the IRS.

Someone who reinvests dividends can reinvest dividends right into bankruptcy, too. They also "prop up the company shares". Everything applies.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by an_asker » Wed Oct 22, 2014 3:27 pm

madbrain wrote:
bru wrote:So I should sell my IBM stock? And take my profit?

A quick search shows IBM beating the S&P over the last 10 years. Even with its recent fall.


"Past performance is no guarantee of future results".

OP:

Just my attempt at answering a rhetorical question here. What percentage of your portfolio is IBM stock? If 100%, yes of course, yesterday! If 5%, mehh!

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Re: IBM: Stock Buybacks Gone Wrong?

Post by FinancialDave » Wed Oct 22, 2014 4:38 pm

ogd wrote:
FinancialDave wrote:Unless you are the one that sells their shares back to IBM it is NOTHING like a dividend. The company can buy back shares right up until the time it goes bankrupt and if you don't sell any of your shares you will get nothing!

fd

FD: see my message above. This is no different than reinvesting dividends, with the difference that "reinvest" and not "cash out" is the default position. Admittedly, you need to go through a bit of bother to match the company's actions if you want to cash out; nevertheless, you are free to sell to maintain the same % ownership like a dividend-spender does, whereas the dividend-reinvestor in the other scenario is not free to avoid paying taxes to the IRS.

Someone who reinvests dividends can reinvest dividends right into bankruptcy, too. They also "prop up the company shares". Everything applies.


Sorry,
I was in fact really comparing apples to oranges - or those who take the dividends compared to companies that buyback shares and the shareholders somehow think this "enriches" them, because this is the general consensus and what you suggest above is not something most shareholders would do, or even could do, in the case of a buyback.

It seems more logical that in 99% of cases if you compared taking the dividend against selling shares of a company in the open market (which you would usually have to do for a buyback,) the risk of these two investment decisions is quite different, as a dividend has no reliance on the effect of day to day market volatility, nor a sales cost, while a stock sale definitely does, as well as commissions and a bid / ask spread. This is a fact that doesn't show up "in the math" but definitely shows up if you try to execute the two procedures.


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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Wed Oct 22, 2014 6:39 pm

an_asker wrote:
madbrain wrote:
bru wrote:So I should sell my IBM stock? And take my profit?

A quick search shows IBM beating the S&P over the last 10 years. Even with its recent fall.


"Past performance is no guarantee of future results".

OP:

Just my attempt at answering a rhetorical question here. What percentage of your portfolio is IBM stock? If 100%, yes of course, yesterday! If 5%, mehh!


I don't know exactly, but it has to be small. My portfolio have a 60% stock allocation, half of which is domestic, and this domestic equity allocation roughly follows Total stock market . I am not sure what the weight of IBM is within the Total stock market.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Wed Oct 22, 2014 6:49 pm

inbox788 wrote:Another important aspect is the divestitures (reverse acquisition) they've done, like getting rid of PC's and servers to Lenovo, which yielded them some cash, but even paying $1.5B for GlobalFoundries to take over their fabs is the complete opposite of a merger and acquisition. It's realizing that they're not adding value to the business, and simply taking over another company can wind up costing them money. Someone else can run the business more efficiently. Besides the list I mentioned earlier, other fabs are probably not on their short list of acquisitions either.


Just one correction, IBM only divested their x86 servers to Lenovo, not all of their servers.

It may be that there is a business size at which it's no longer possible to efficiently manage. When there are too many parts and none can individually make much difference in the overall earnings, I can see how that would be the case. IBM has 400,000 employees so that has to be a lot of parts to keep track of.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by madbrain » Wed Oct 22, 2014 6:57 pm

bru wrote:
madbrain wrote:
bru wrote:So I should sell my IBM stock? And take my profit?

A quick search shows IBM beating the S&P over the last 10 years. Even with its recent fall.


"Past performance is no guarantee of future results".
Brilliant response.

People are saying IBM's buyback program didn't work. Seems to me it did.


Am detecting irony in your post ?
The IBM buyback program worked in that it reduced the number of shares without reducing earnings, thus, it increased earnings per share.
And that in turned propped up the share price.

But buybacks can only go so far. The company doesn't have unlimited amounts of cash to buy back more and more shares. It cannot buy back all of its shares and take itself private - unless the business is discounted as having negative value, ie. the market capitalization is lower than book value. And would you sell back your shares if that was the case ?

So what's next ? Issue debt to buy back even more shares ? I don't think the account tricks can work forever, and there will be debt repayments.
Or grow the overall business, which is hard to do quickly with such a behemoth.
Or become more nimble, ie. break it down into more manageable parts.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by ClevrChico » Wed Oct 22, 2014 7:04 pm

nisiprius wrote:Anyone interested in IBM should read Robert X. Cringely's searing, scathing, lacerating, brutal, blistering, excoriating critique, The Decline and Fall of IBM. See the introduction here to get the idea. According to Cringely, Wall Street is just beginning to realize that IBM is in trouble, and according to him buybacks are part of the problem; not buybacks as such, but a decision to focus the company on the goal of reaching earnings of $20 per share by 2015. According to Cringely, "Customers no longer trust IBM to manage projects well, get the projects finished, or have the projects work as promised."


Cringely is right. IBM's recent history is not kind to employees or customers. I don't know what Buffett is thinking. Ten years ago we had a dedicated IBM rep and local educational seminars twice/year. IBM was admired. I have no idea who the rep is now and the seminars are long gone. On top of all that, where is their innovation?

The Thinkpad was the best thing IBM did, and they sold it.
Last edited by ClevrChico on Wed Oct 22, 2014 10:41 pm, edited 1 time in total.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by Ged » Wed Oct 22, 2014 7:10 pm

I think it's going to take a lot more than stock buyback mistakes to kill IBM. This company still has immense technical and financial resources, and what is probably the best corporate R&D organization in the world.

It may have lost it's way but that is far from being dead. Many large companies go through periods like this and come back renewed.

It's just going to be painful to be concentrated in IBM stock for a while.

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Re: IBM: Stock Buybacks Gone Wrong?

Post by FinancialDave » Wed Oct 22, 2014 7:20 pm

Ged wrote:I think it's going to take a lot more than stock buyback mistakes to kill IBM. This company still has immense technical and financial resources, and what is probably the best corporate R&D organization in the world.

It may have lost it's way but that is far from being dead. Many large companies go through periods like this and come back renewed.

It's just going to be painful to be concentrated in IBM stock for a while.


I would probably agree with this -- I thought they were down and out 30 years ago during the PC revolution, but they proved they could re-invent themselves then and I don't doubt they will do it again. Otherwise you would have to bet against Buffett as well, which has rarely proven to be a good idea!

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Re: IBM: Stock Buybacks Gone Wrong?

Post by ogd » Wed Oct 22, 2014 9:41 pm

FinancialDave wrote:Sorry,
I was in fact really comparing apples to oranges - or those who take the dividends compared to companies that buyback shares and the shareholders somehow think this "enriches" them, because this is the general consensus and what you suggest above is not something most shareholders would do, or even could do, in the case of a buyback.

It seems more logical that in 99% of cases if you compared taking the dividend against selling shares of a company in the open market (which you would usually have to do for a buyback,) the risk of these two investment decisions is quite different, as a dividend has no reliance on the effect of day to day market volatility, nor a sales cost, while a stock sale definitely does, as well as commissions and a bid / ask spread. This is a fact that doesn't show up "in the math" but definitely shows up if you try to execute the two procedures.

So I can accept that if you're in the mode where you spend dividends from individual stocks, the dividend is simply a more convenient form of delivery.

Mainly because of the fees and bid/ask spreads, mind you. As for price volatility, I don't see what the big deal is; if you sell at roughly the same price the company bought back, you're still in the same place with your remaining ownership, and if it's a little different, it can go either way.

But for a lot of us -- and for deciding what strategy you want to be in when you retire, which I feel is one of the points being pressed in this discussion -- this is not that relevant. What I do now is reinvest everything; what I'll do then is sell bonds during a crash, sell stocks only when they do well; and mutual funds so no fees, no spreads. If you're in one of these modes, buybacks work well.

The other thing I'm noticing these days with my settled allocation and recent volatility is that the capital losses harvested in 2009 aren't really being depleted; enough ongoing harvesting to pay for rebalancing for the foreseeable future. So this make dividends even more annoying, with the 23.8% penalty, vs no capital gains now and what looks to be a long, long deferral horizon (reducing the effective CG tax to less than 10% probably).

If anyone thinks buybacks are a harbinger of poor future returns, you're welcome to find a fund that avoids them, or create your own. And prepare to be disappointed, because it's never this easy.

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