Apples are apples as they say. At least sometimes apples are apples. But all is not always as it appears. Much has and is being made about price earnings ratios, stock buybacks, corporate leverage and more.
These metrics all have an impact on the value of a share of stock. Anyone who who has followed what I have been saying over the last 9 years knows the value I have placed on the single most important number of a company’s performance-The Bottom Line.
While the bottom lines have been less than stellar for some time now for many of the Dow 30 companies, the Earnings Per Share numbers have been spectacular. Why? Stock Buybacks.
Just how many shares have companies been buying back? Here is a table of buy backs over the last 5 years. The numbers are staggering for a few of these because several of these companies are borrowing large sums of money to do so. The question we need to ask is where the dollars are going to come from when these sums need to be paid back? Are they going to be issuing shares? Earnings(which are falling)? Or both?
| Travelers | -28% | ||
| Home Depot | -23% | ||
| Pfizer | -23% | ||
| IBM | -22% | ||
| Visa | -18% | ||
| American Express | -16% | ||
| Exxon-Mobil | -16% | ||
| Goldman Sachs | -14% | ||
| MMM | -13% | ||
| Intel | -13% | ||
| United Health | -13% | ||
| Nike | -11% | ||
| Apple | -11% | ||
| Disney | -11% | ||
| McDonalds | -11% | ||
| Cisco | -10% | ||
Travelers tops the list, on track to have purchased back a whopping 28% of its shares by the end of 2015. Sixteen of the Dow 30 will have repurchased 10% or more of its shares by the end of the year.
The heavy share buybacks is one of the reasons that prices have continued rising. Investors see the EPS increase(even if bottom line profits do not) and buy more shares. The companies, seeing that investors are liking the EPS growth, buy back more shares and keep the game going.
How effective is this game? Let’s see if you can pick the right answer to the following question:
For the years 2013, 2014, and 2015, how many of these years saw the DOW 30 companies actually earn more dollars than the previous year?
And for bonus points- Which year was the best?
If you answered All, you are far off the mark. In fact, only one of those years will see the Dow 30 earn more dollars in total.
Which year was the best? That is going to be 2014.
The year 2015 is on track to post a 7.9% drop in total earnings.
How does one hide such abysmal performances?
That’s right! Stock Buy Backs.
And the games continue.
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