Some investors don't like the notion of companies buying back their own stock, regardless of the situation; others love the concept. I've always taken a middle-of-the-road stance in that I think there's a right time, and a wrong time, for companies like International Business Machines Corp. (IBM -0.35%), and others with large cash hoards, to pare diluted shares outstanding.
Adobe (ADBE -0.72%) is another company that's opted to initiate a relatively hefty share buyback program, authorizing the repurchase of as much as $2.5 billion of stock by the end of its fiscal 2019 year. The upgraded buyback plan was given the go-ahead by Adobe's board of directors earlier this year.
The question remains: When IBM, Adobe, and others choose to use ready cash for repurchases, are they making sound, long-term moves, or ongoing mistakes?
Image source: IBM.
All the way, or no way at all
Share buybacks have been the norm with IBM for years. Case in point: IBM has bought back approximately $48 billion of its own stock over the past five years, including$2.73 billion in the first half of 2017. For perspective, IBM spent $1.78 billion to buy its own stock in the first six months of last year.
In IBM's case, buying just shy of 19 million shares back this year is a good move, and here's why.
As IBM continues its transformation away from legacy hardware solutions to focus on its strategic imperatives, blockchain, and other cutting-edge markets, its stock has meandered. Unfortunately for shareholders, other than a short run here and there, IBM's performance hasn't impressed, even considering its outstanding 4.1% dividend yield.
In the past five years IBM stock is down 30%, not exactly dire over a five-year period, but it's underperformed, to put it mildly. Just this year IBM is down 11%, though to its credit -- heading into third-quarter earnings on Oct. 17 -- the past month has been relatively positive, with IBM shares climbing 3%.
The reason that IBM's stock performance plays such a critical role in determining whether its significant buyback plan makes sense is the same reason value investors should give it a hard look. The old maxim "buy low, sell high" is simplistic, yes, but there's an underlying truth to it. IBM stock has been, and remains, a screaming value; it's trading at a mere 10.4 times future earnings, nearly half of its peer average of 19.9 today.
If CEO Ginni Rometty and team can get the company's all-important strategic imperatives unit kick-started, IBM could prove to be a long-term steal for value investors. Rometty certainly thinks IBM will get things turned around; the 18.7 million shares taken off the open market in 2017 are evidence of that.
Not so much
Investors who dislike the notion of repurchase programs can point to Adobe as an example where it doesn't make much sense. Adobe bought back slightly more than 4 million of its own shares in the first nine months of its 2017 fiscal year ending Sept. 1.
Adobe's $5.37 billion in cash and equivalents is more than adequate for a repurchase plan, but its stock is up 44% year to date, and not long ago, it was bumping up against all-time highs. That's not the time to buy over 4 million shares. And the way its stock is performing -- deservedly so, for a host of reasons -- the rest of Adobe's self-investments will also come at soaring valuations.
Though I remain bullish on Adobe, how about a dividend for shareholders instead of share buybacks?
Final thoughts
Between cash and marketable securities, IBM boasted $12.3 billion on its balance sheet last quarter, so there's little chance its program will threaten its financial soundness. And combining this with its depressed stock price, Rometty is right to ratchet up IBM's investment in itself.
