) is a poster child for the ill-effects of the Fed's financial
repression. In effect, the Fed's zero interest rate policies are
telling big companies to issue truckloads of debt and use the
proceeds to buyback shares hand-over-fist. That way fast money
speculators on Wall Street are appeased by the resulting share
price lift, and top executives collect bigger winnings on their
In its recently completed quarter, IBM again repurchased nearly
$4 billion of stock-which amounted to about 93% of its net income
for Q2. Likewise, IBM also reported lower sales versus prior year
for the ninth quarter in a row.
This juxtaposition should not be surprising. For more than a
decade now, IBM has been eating its seed corn. Since the
beginning of fiscal 2004, Big Blue has posted $131 billion in
cumulative net income, but saw fit to reinvest fully $124 billion
or 95% of its earnings in its own balance sheet, which is to say,
in buying back its own stock.
At the same time, it also paid out nearly $30 billion in
dividends. In combination, therefore, it disgorged $153 billion
in buybacks and dividends--or 117% of its net income! And this
wasn't a temporary maneuver: These figures represent the results
of IBMs last 42 quarters. In short, IBM has become a stock price
inflation machine, driven by the pressures and opportunities
emanating from the Wall Street casino fostered by the Fed.
During that same period, IBM invested a mere $45 billion in
CapEx, and that was hardly 90% of its charges for depreciation
and amortization of existing capital assets. Given the fact that
Capex is measured in current dollars, and D&A allowances are
expressed in historical dollars, it is evident that in real terms
IBM has been drastically underinvesting in its capital base.
Moreover, the same thing is true when the investment component
that is charged to the current P&L is examined. As a giant in
the global technology industry, IBM needs to spend heavily on
research, development and engineering (RD&E) to keep up with
the competition. But it hasn't. During fiscal 2013 it spent $6.2
billion on RD&E-but that represented a 14% decline in real
terms from the $7.2 billion (2013$) it spent ten years ago.
So how has it managed to keep the game going? In a word, by
means of financial engineering. Its tax rate has been cut in
half-from 30% to barely 15%. It has spent nearly $30 billion on
acquisitions, repeatedly creating accounting reserves (i.e.
cookie jars) at the get-go in order to insure that the dozens of
small companies bought with cheap debt were highly accretive to
But at the end of the day, it was done by sacrificing its
balance sheet. In 2004 IBM had $13 billion of net debt. Today the
figure stands at just under $37 billion. And why not. IBM's
average weighted cost of debt last year was just shy of 1%. Thank
you, monetary politburo!
Needless to say, under a honest free market in the financial
sector, America's once greatest technology company would not be
functioning as a slush fund for Wall Street gamblers.
SIGA Technologies' (
) CEO Eric Rose on Q2 2014 Results - Earnings Call Transcript