Share Buybacks Reach Highest Level Since 2007

The Only Two Ways Left for Companies to Prop Up EarningsSo far this year, share buybacks announced by public companies have reached a cumulative total of $460 billion—the highest since 2007, which was the year the Dow Jones Industrial Average peaked above 14,000 before starting its crash all the way down to 6,440. (Source: Reuters, December 17, 2013.)

When companies buy back their own shares, they reduce the amount of shares they have outstanding. Hence, a company can have the same earnings in 2012 as it does in 2013, but if it has fewer shares outstanding in 2013 (because it bought shares back during the year), its profit per share is higher even though total net income has not changed. In these pages, I have referred to this practice as “financial engineering” to make companies look like they’re posting earnings growth, when really they’re not

One of the biggest share buyback announcements this year came from 3M Company (NYSE/MMM), which reported it would go ahead with a share buyback worth $22.0 billion over the next five years through to 2017. (Source: Ibid.)

The board of The Boeing Company (NYSE/BA), another big-cap company in the key stock indices, authorized an additional $10.0 billion to its share buyback program.

Cisco Systems, Inc. (NASDAQ/CSCO), the network and communications device giant, while announcing its financial results for the first quarter of fiscal year 2014, said it has authorized $15.0 billion in share buybacks. (Source: Cisco Systems, Inc., November 13, 2013.) Although no exact date was given on when the company would go out and start buying its shares back, it’s very interesting to note that the $15.0 billion that Cisco has authorized for its share buyback program is larger than the company’s corporate earnings for the entire fiscal year of 2013!

The bottom line, at least as far as I’m concerned, is that since revenue growth has fallen to its lowest level since 2009, next year will be a very challenging year to achieve profit growth. Hence, public companies have two choices to boost per-share earnings in the wake of missing sales growth: cut costs and/or execute on even more share buybacks, neither of which are sustainable over the long term.

What He Said:

“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of lowering interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in Profit Confidential, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning of how the coming real estate bust would wreak havoc with the banking system.