IBM, Nestle stock buybacks boost recovery hopes
"Its a pretty significant amount," Broadpoint AMTech analyst Brian Marshall told DailyFinance. "I think they're trying to get the stock moving." Stock buybacks are a way of management to signal confidence in a company -- and they're good for shareholders, because they reduce the number of shares outstanding, increasing earnings per share.
"They're all about financial engineering," Marshall said. "They're trying to grow their earnings per share through innovative measures, what I call financial engineering. Higher margin revenues, driving down costs, and buying back shares, which is a key component of their financial playbook."
So far this year, Armonk, New York-based IBM has seen its shares climb 43 percent, and is among a growing number of companies that have bought back their own stock. IBM shares rose 1.2 percent to $121.57 after the announcement.
IBM ended the third quarter sitting on a cash hoard of $11.5 billion. During the third quarter, the company generated $3.4 billion in free cash flow, up $1.3 billion from a year ago. Still, thanks to the recession, Big Blue's sales over the first three quarters of 2009 were down 11 percent from the same period a year ago.
"IBM is hungry for acquisitions in the software and IT services area," Marshall said. "For example, there's Brocade, a deal that would be accretive and much better than just keeping the cash in the bank." For month rumors have been swirling in the tech industry that Brocade could be for sale.
"I think there are several interested bidders, including HP," Marshall said, "and I would guess Brocade had hired financial advisers."
In another major stock buyback, Nestle, the world's largest food company, said will repurchase nearly $7 billion worth of shares this year, increasing its program from $4 billion, thanks to what it called "solid operational performance" this year. Travelers, the giant insurer, said this month that its board approved $6 billion in stock buybacks, and raised its dividend payout.
IBM CEO Samuel Palmisano said Big Blue, long one of the essential American blue-chip companies, has returned more than $70 billion to shareholders in the form of dividends and buybacks in recent years.
IBM is one of the most storied companies in the history of American capitalism, having grown from a cobbled-together band of scale and measurement companies incorporated in 1911 to the corporate icon it is today, with some 400,000 employees worldwide.
Recently, IBM's reputation was besmirched by the revelation that a veteran company executive was wrapped up in the Galleon insider trading scandal. Bob Moffat, a 53-year-old senior VP, who had once run the person computer division, has been charged with leaking information about IBM's earnings as part of a wide insider trading scam. Moffat had been with IBM for some 31 years, before being put on temporary leave earlier this month after the scandal broke, and had been on a short list of candidates to succeed Palmisano as CEO.
"This guy is the most honest, hardest-working IBMer, true-blue worker you will ever meet in your life," Joe Formichelli, a former Moffat colleague, told Bloomberg. "I don't know how he got tangled up in this mess." Moffat's attorney, Kerry Lawrence, has maintained his client's innocence.