Chris, Nope, you aren't really missing anything. As I said, the co. has to have current eps growth above the rate they pay on interest. But let's use an example, ignoring taxes, as they tend to be a close tradeoff: A co. has scammed 8% eps growth with tax miracles and cutting R&D, etc. and can borrow at 6%. So, if they cut the shares in half by borrowing money to buy back shares, they are earning an extra 8% on the lesser shares and paying out 6% more in the expense column, yielding a net to the eps of 2%. Now they have grown at 10%, not 8%.
But, if you have an old tech co. like IBM with positive free cash flow, you do not have to borrow all of it. By cutting the % allocated to R&D, you can buy back shares with the money and get a double boost in the near term. That is a no cost deal short term, but probably huge cost longer term.
IBM is using a combo of borrowed money and free cash flow to pump up the eps and the stock price.
BTW, you mentioned more detailed reports on IBM. I am using the eps report available here on SI. It is fairly detailed, but you can get it under the news section on the stock. |
