Tippet, Tippet, Tippet my boy, what am I to do with you?
I will try to explain this one more time. Now I don't have time to explain all of the nuances of Consolidated Financial Statements, Subsidiarys, equity financing, etc., etc., etc.. However, you do not need to be a finance major to understand this one very simple fact...IBM is not using debt to repurchase its shares, it is doing so out of its operating income. Let me repeat one more time, IBM is not using debt to fund its share buy back program. OK, so far so good?
Now, lets take IBM Credit Corporation (ICC), an IBM subsidiary, that's right, a subsidiary, and view their debt on an equity basis (don't panic, I will get to that). Doing that, IBM's "core" debt was roughly $3.1 billion at the end of 1997 with a net income of $6.1 billion. I don't think it has changed much since then. At the end of 1994, when LVG returned IBM back to profitability, IBM's "core" debt was about $3 billion with a net income of $3 billion. OK, let's do the math. Increase earnings by over 100%, increase debt by 3%. OK, so far so good?
Now, since 1995, IBM has repurchased about 182 million shares of stock at a cost of $17.8 billion through 1997 (don't have 1998 numbers yet). Among other things, the stock was used to fund the Employee Benefits Program. Why? Because some astute soul in IBM said, "Hey, this stock is a good value, let's buy the sucker!". Cost to purchase $17.8 million, value on 10/23/98, $25.8 million, up 45%. Good investment? I think so. Good for shareholder value? I think so. Again, let me repeat in case the point is still not clear...in three years, IBM has purchased $17.8 million of its stock (now worth $25.8 million) with no, let me repeat, NO increase in its core debt.
Now I promised I would get to equity financing (any of you bankers out there, feel free to jump in). ICC is a subsidiary, with its own balance sheet and funding. View it as a bank of sorts. Do you realize that all of the banks in the world are up to debt to their ass? YESSS, they are!!! Deposits my friend, that money that we give them, is debt!
They have to pay it back, even pay interest on some of it! So, using the logic supported by some, the best banking stock to buy is one with no debt, one with no deposits. I invest in banking stocks, but I don't think I want to invest in one with no debt, oh excuse me, no deposits.
Now, ICC carrys a debt of over $24 billion, an increase of over $3.2 billion from 1996. Oh, oh, that must be bad. But wait, their profits are up by over 28% this year. How can that be? Well, it must be because they are loaning more money, just like a well managed bank does. Debt is raw material to a finance company, it is the material that allows them to provide a product. Banks, GE Capital, GMAC, and a host of others, including ICC use that debt to produce something we all treasure....PROFITS!!!
OK, class, let me summarize. IBM is not increasing core debt. IBM is not using debt to repurchase shares. Increase in debt shown on its Consolidated Financial statement is debt incurred by ICC to run its business, and yes Virgina, to make a profit. Now I suppose IBM the parent company could loan ICC the money at 6%. Boy would that make the shareholders happy! Even better, lets get Gates to loan them the money I hear he is sitting on about $17 billion of cash and would be simply overjoyed to get a 6% return.
OK, now that I have that off my chest, let's get off this crap about debt. It's a joke! Let's talk about the prospects of this company, about where we think the stock price will go. We can even talk about the death of the mainframe/PC, you choose. But let's not waste any more time talking about debt! If you don't understand this, I am sure your local community college offers some basic classes on finance that I recommend you take. |
