Do you remember the old Smith, Barney television ad where the professorial actor said “We make money the old fashion way. We EARN it.”?
More executives appear to need reminding of this. In today’s market report from Merrill Lynch (see info here, page 2) we learn that in the first quarter of 2007 the S&P 500 spent an incredible $117BILLION on share buybacks. So much was spent buying back shares that it added from a full point to 1.5 points to EPS for the quarter! In May and June IBM, WalMart and Home Depot announced share buyback plans of $50Billion (and keep in mind, just yesterday Home Depot announced real earnings would be down 18% this year! [see page 1 of same link]). Conoco and Johnson & Johnson are announcing plans to buy back $25Billion of equity between them.
When businesses are growing they spend money on hiring employees, building plants and offices, traveling to see customers and making new products. When they want to Defend & Extend their existing business they take the money out of such productive long-term uses and spend it instead on buying back their own stock. An action which does not create a single job, nor new product, nor help the business create enhanced growth in revenue or profitability. We have to be careful not to confuse financial machinations with real growth.