Forum Home Page [see Broadridge note below]

 The Shareholder ForumTM`

Fair Investor Access

See related case examples of

Dell Inc.

appraisal rights for intrinsic value realization

and

Walgreen Co.

stock buyback policies

"Fair Access" Home Page

"Fair Access" Program Reference

For graphs of specific company and related industry returns, see

Returns on Corporate Capital

For graphs of specific company voting for the past 5 years, see

Shareholder Support Rankings

 

 

 

Forum reference:

Analyzing investments based on fundamental business performance

 

For previous Forum attention to issues addressed in the article below, see the "Stock Buyback Policy" section of the reference page for the Forum's 2014 Walgreen project.

 

Source: Dow Jones MarketWatch, October 25, 2015 article

 

Deep Dive

Opinion: Companies are wasting money from layoffs on share buybacks

By Philip van Doorn

Published: Oct 25, 2015 11:17 a.m. ET

Dow Chemical, 3M and other companies might want to concentrate more on boosting sales

Bloomberg News/Landov
Biogen said Wednesday it would eliminate 11% of its workforce and invest the $250 million in savings in various business projects. The biotech company spent $900 million in share repurchases since Sept. 30.

What do you make of a company that announces restructuring moves that include possible job cuts while it buys back shares?

For starters, if a company whose stock you own continues to boost (or mitigate the decline of) earnings per share (EPS) by buying back shares, while not increasing sales, chances are the buybacks aren’t helping. The stock has probably been declining in value, and EPS may not be growing. Maybe the buybacks aren’t reducing the diluted share count by much because so many new shares are being handed to executives.

That is why it’s a good idea to pay attention to companies’ quarterly earnings announcements, despite unctuous executives’ insistence on using so much boiler-plate language when communicating with their companies’ owners.

Not all buybacks are bad, and not all restructuring plans are bad. But a combination of the two warrants extra scrutiny.

Here’s a mixed bag of big companies’ restructuring announcements Wednesday and Thursday:

  • Biogen Inc. said it would cut 11% of its workforce, even though the company beat the consensus third-quarter earnings estimate, increased sales by 11% and raised full-year earnings guidance. Biogen plans to cut expenses by $250 million a year and reinvest the money in various initiatives. Also on Wednesday, Biogen said that as of Sept. 30, it had completed $3 billion of its $5 billion share-buyback program, and had bought back another $900 million worth of shares since Sept. 30. The average share count for the third quarter was down 1.8% from a year earlier.

  • 3M Co. will slash 1,500 positions worldwide and save an estimated $130 million pre-tax next year. Third-quarter earnings per share were up 3.5% from a year earlier, but sales were down 5.2% because foreign-currency translations reduced sales by 7.4%. The company bought back $1.5 billion worth of shares in the quarter, and its average share count declined 4.1% from a year earlier.

  • Dow Chemical Co. said it would continue a long series of restructuring moves in its partnership investments in Kuwait and the U.S. Gulf Coast, and receive $1.5 billion from a reduction in its ownership of MEGlobal. The company boosted its dividend by 10% and accelerated its stock-buyback plan. Dow’s adjusted operating earnings were up 15% from a year earlier to 82 cents a share. But sales slumped 16% to $12 billion, “driven by pricing and currency.” The diluted share count inched up 5.6% from a year earlier, reflecting the conversion of preferred shares into common shares. Dow spun off Olin Corp. on Oct. 5. That deal reduced Dow’s share count by about 34 million, completing $6.5 billion of a $9.5 billion share-repurchase program.

  • Caterpillar Inc.’s third-quarter earnings tumbled to $368 million, or 62 cents a share, from $1 billion, or $1.63, a year earlier, as sales dropped 19% to $11 billion. The company expects restructuring costs to total about $800 million for 2015. The company said Sept. 24 that it will slim its workforce by 4,000 to 5,000 salaried employees by the end of 2016, with cuts of up to 10,000 by the end of 2018. Severance costs will ultimately total about $2 billion. Caterpillar’s full-time headcount declined by 2,325 to 108,922 employees in the third quarter. The company bought back $1.5 billion in shares in those three months, leaving the share count down 4.5% from a year earlier.

  • Perrigo Co. said it would cut its workforce by about 6%. The company didn’t provide a specific number of jobs, though Perrigo had 7,550 employees at the end of 2014. As part of its strategy to fight off a takeover bid by Mylan NV Perrigo said it would sell its vitamins business and buy back $2 billion worth of shares. The over-the-counter and generic-drug manufacturer said net sales soared 41%.

International Business Machines Corp. didn’t announce any layoffs for last quarter, but said it bought back $1.5 billion worth of shares. Meanwhile, its stock dropped 10% in those three months. Its own stock, alas, isn’t IBM’s best investment. Sales sank 13.9%, and operating earnings per share were down 9%, despite a 1.9% reduction in the share count.

The bottom line is that financial engineering could be a bad sign for an investor looking to make money from a long-term investment.

You should look beyond the headlines saying whether a company has “beaten” or “missed” quarterly estimates for earnings per share. They mean nothing. Any business or industry can have a bad quarter here and there, and it is quite common for an accounting or other change to greatly affect EPS.

Sales growth, or a lack thereof, can be a much better indicator of how a company is faring.

Meat and potatoes

Here are changes in third-quarter sales per share for the five companies listed above as well as IBM:

Company

Ticker

Sales per share - most recent quarter

Sales per share - year earlier

Change in sales per share

Perrigo Co. PLC

PRGO, +1.96%

$9.15

$7.08

29.3%

Biogen Inc.

BIIB, +0.06%

$11.94

$10.59

12.8%

3M Co.

MMM, -0.13%

$12.22

$12.37

-1.2%

International Business Machines Corp.

IBM, +0.41%

$19.69

$22.45

-12.3%

Caterpillar Inc.

CAT, +1.23%

$18.43

$21.75

-15.3%

Dow Chemical Co.

DOW, +0.80%

$9.62

$12.17

-21.0%

Sources: FactSet, company filings

This shows a stark difference in what each restructuring story might really mean for investors. Yes, it’s sad to see so many people losing their jobs at Perrigo and Biogen, but at least the companies are increasing sales. And Biogen said it would use savings from the job cuts for new ventures.

If a company is generating better sales and earnings growth, stock buybacks can pay off nicely, since they boost EPS. Otherwise, this sort of “return of capital” can be a complete waste to shareholders, since the stock price may continue to slide.

IBM CEO Ginni Rometty said that the company had “strong growth [of 27%] in our strategic imperatives,” which include “cloud, analytics and engagement,” during the third quarter. That’s great, but what about the legacy business that’s dragging down revenue and profits?

If IBM were to make a radical transformation and unload more legacy units, what would it do with the cash? If it didn’t need the money to reinvest in its “strategic imperatives,” maybe a higher quarterly dividend or a special dividend would be much more friendly to shareholders. Yes, there might be tax disadvantages, but at least investors would have the money in their hands.

Here’s how the six socks have fared:

Company

Total return - 12 months

Total return - 3 years

Total return - 5 years

Total return - 10 years

Perrigo Co. PLC

4%

33%

144%

1,163%

Biogen Inc.

-15%

90%

374%

607%

3M Co.

9%

73%

87%

159%

International Business Machines Corp.

-11%

-22%

12%

104%

Caterpillar Inc.

-25%

-10%

-1%

82%

Dow Chemical Co.

2%

76%

84%

57%

S&P 500 Index

6%

50%

90%

112%

Sources FactSet

And here’s how analysts view them:

Company

Closing price - Oct. 21

Consensus price target

Implied upside

Share of analysts with ‘buy’ ratings

Price/consensus 2016 EPS estimate

Perrigo Co. PLC

$155.24

$198.80

28%

33%

17.4

Biogen Inc.

$276.34

$372.18

35%

65%

15.1

3M Co.

$149.82

$156.73

5%

41%

17.5

International Business Machines Corp.

$140.92

$148.90

6%

21%

9.3

Caterpillar Inc.

$69.97

$70.32

1%

19%

18.1

Dow Chemical Co.

$47.48

$53.29

12%

58%

13.5

S&P 500 Index

 

 

 

 

15.9

Sources FactSet

 

 

 

Philip van Doorn

Philip van Doorn covers various investment and industry topics. He has previously worked as a senior analyst at TheStreet.com. He also has experience in community banking and as a credit analyst at the Federal Home Loan Bank of New York.

This is an interesting group of stocks because of all the moving parts, but even sell-side analysts, who tend to have a sunny view when assigning ratings, favor only Biogen and Dow Chemical.

The important thing for an investor is to take a keen interest in what’s really going on at a company. All companies try their best to paint a rosy picture in their quarterly reports. A deeper look may tell you something completely different.

 

Copyright ©2015 MarketWatch, Inc.

 

 

 

This Forum program is open, free of charge, to anyone concerned with investor interests in the development of marketplace standards for expanded access to information for securities valuation and shareholder voting decisions. As stated in the posted Conditions of Participation, the Forum's purpose is to provide decision-makers with access to information and a free exchange of views on the issues presented in the program's Forum Summary. Each participant is expected to make independent use of information obtained through the Forum, subject to the privacy rights of other participants.  It is a Forum rule that participants will not be identified or quoted without their explicit permission.

This Forum program was initiated to address issues and objectives defined by participants in the 2010 "E-Meetings" program relevant to broad public interests in marketplace practices, rather than investor decisions relating to only a single company. The Forum may therefore invite program support of several companies that can provide both expertise and examples of leadership relating to the issues being addressed.

Inquiries about this Forum program and requests to be included in its distribution list may be addressed to access@shareholderforum.com.

The information provided to Forum participants is intended for their private reference, and permission has not been granted for the republishing of any copyrighted material. The material presented on this web site is the responsibility of Gary Lutin, as chairman of the Shareholder Forum.

Shareholder Forum™ is a trademark owned by The Shareholder Forum, Inc., for the programs conducted since 1999 to support investor access to decision-making information. It should be noted that we have no responsibility for the services that Broadridge Financial Solutions, Inc., introduced for review in the Forum's 2010 "E-Meetings" program and has since been offering with the “Shareholder Forum” name, and we have asked Broadridge to use a different name that does not suggest our support or endorsement.