IBM is the “poster child” for the “balance sheet” recovery that has seen companies engage in financial engineering rater than invest in their business, said Stanley Druckenmiller at CNBC’s Institutional Investor Delivering Alpha Conference.
Druckenmiller highlighted what he called a “shocking” statistic about IBM: their sales are what they were six years ago.
Druckenmiller said, “Let me give you a few shocking statistics. IBM’s sales are where they were six years ago. Despite the increase you saw in sales, industrial production and corporate customers, they have had no increase in sales whatsoever.”
Over that time, Druckenmiller said, IBM has tripled their debt load to buy back stock instead of invest in their business.
Buying back stock is a way that companies can improve their earnings per share, as it reduces the number of shares outstanding, thereby reducing the denominator when computing earnings per share — a company’s net income divided by its shares outstanding.
Much of Druckenmiller’s critique is made against the backdrop of what he sees as harmful Fed policy that is encouraging companies to engage in financial engineering rather than invest in their business.
“This is [companies’ response to Fed policy],” Druckenmiller said. “I don’t mean to pick on IBM, but this is the whole U.S. economy… Capital spending is the lowest it’s been relative to sales in many, many years. That’s the reason productivity is down. We’ve got to get out of this financial engineering stuff and get more into investing in the real economy.”
This chart from Ed Yardeni shows the relationship between an increase in buybacks and an increase in the S&P 500. Yet another example of how the stock market isn’t the economy.