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Technology Stocks : IBM
IBM 290.44+0.7%3:59 PM EST
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To: Alcona who wrote (6914)10/17/2000 8:44:17 PM
From: Jonathan Edwards  Read Replies (5) of 8218
 
IBM has for several years now spent each quarter's net income (and often of late a bit more, although this quarter was an exception) buying back its own shares. This is a way to distribute net earnings to shareholders in a manner that allows the shareholders to decide whether or not to take the distribution and if so whether to pay income taxes on it at the regular or the more favored long term capital gains rate.

One can argue about the wisdom of this practice - clearly it helps the stock price, although with 1.7 billion shares outstanding they can only buy up about 1% of the shares per quarter. But it tends to leave little left over to invest in expanding the business (and the practice of spending more than net income on buybacks is clearly not a viable longterm strategy). On the other hand, how fast can a $80 billion company expand?

From the IBM website, we have the following figures for stockholders' equity as of 12/31 of each year:

1993 - 19738
1994 - 23413
1995 - 22423
1996 - 21628
1997 - 19816
1998 - 19433
1999 - 20511
2000 - 19547 (end of 3Q)

There are no doubt all sorts of complicated accounting rules of which I am ignorant (but willing to learn about if someone will explain them) that affect stockholders' equity, but as a first approximation if you have positive net income (which IBM has since 1994) combined with declining stockholders' equity (as happened in 1995, 1996, 1997, 1998, and 2000 to date), it means you've spent more than you made to buy back stock...
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