Tags: Brown | stock | buyback | earnings

Josh Brown: Stock Buybacks Are a Gimmick for at Least 3 Blue Chips

By    |   Wednesday, 22 October 2014 02:31 PM

Three corporate icons — McDonald's, IBM and Coca-Cola — have been relying on share buybacks to push their stocks higher, but that tactic is not a substitute for real growth, and appears to be wearing out.

The blue chip trio has suffered setbacks recently, with earnings reports that have disappointed investors. Josh Brown of Ritholtz Wealth Management noted they are ranked high in the Fortune 500 and make up 12 percent of the Dow Jones Industrial Average's weighting.

"And all three are plagued by the same problem – they're shrinking. More than this, their shrinkage is finally being recognized on The Street, now that investors are peeling back all of the layers of buyback and dividend subterfuge that've kept this fact disguised for so many years," Brown wrote on his blog, The Reformed Broker.

Brown said McDonald's had been "trading like a bond," kept afloat by a 3 percent dividend and aggressive buybacks that masked bigger problems beneath the surface. However, with the company's admission this week that its profits are down 30 percent, the truth is out.

Coca Cola is not much different, and reported dismal earnings as well, he noted.

"Coca-Cola's core business, diet and regular soda, is dead," he declared. " Everyone knows it except for shareholders . . . They've been shareholder-friendly on management incentives, dividends and buybacks as well — but it may not be enough anymore. Coca-Cola is not growing and its core product has become increasingly meaningless to the next generation of consumers."

Big blue IBM, meanwhile, is the "very poster child of this moment in buybacks-trump-anything investing," according to Brown, which reflects the punishment this week it has suffered after missing third-quarter earnings.

"IBM has spent $140 billion since the year 2000 on dividends and buybacks. Which has been great for shareholders, but not so great for the business: IBM has missed out on or underinvested in every single major trend within the technology space for the last decade."

The three corporate titans might be the tip of a bigger iceberg among U.S. companies, Brown predicted.

"Buybacks have far outpaced revenue growth for the U.S. stock market in the modern age and these three companies are emblematic of what that looks like as the fairy dust begins to wear off. What this could mean for a host of other stocks going forward is not encouraging."

Reuters speculated that stocks took a big spill earlier this month, in part because of blackout periods on buybacks.

"One factor that could have accelerated the decline was that many U.S. companies were out of the corporate repurchase market as they headed into earnings season," Reuters noted.

Only approximately $1.7 billion in stock repurchases occurred through mid-October, compared with $250 billion during the first nine months of 2014, according to Thomson Reuters data.

S&P 500 companies have been plowing 95 percent of their profits into stock buybacks, data compiled by Bloomberg and S&P Dow Jones Indices show.

"Buybacks have helped fuel one of the strongest rallies of the past 50 years as stocks with the most repurchases gained more than 300 percent since March 2009," Bloomberg stated. "Now, with returns slowing, investors say executives risk snuffing out the bull market unless they start plowing money into their businesses."

"You can only go so far with financial engineering before you actually have to have a business with real growth," Chris Bouffard, chief investment officer who oversees $9 billion at Mutual Fund Store, told Bloomberg. "Companies have done about all that they can in terms of maximizing the ability to do those buybacks.

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Three corporate icons — McDonald's, IBM and Coca-Cola — have been relying on share buybacks to push their stocks higher, but that tactic is not a substitute for real growth, and appears to be wearing out.
Brown, stock, buyback, earnings
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2014-31-22
Wednesday, 22 October 2014 02:31 PM
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