All You Need is Two Points

12/25/2013 12:01 am EST


Jim Jubak

Founder and Editor,

Several stocks had very important announcements last week and MoneyShow's Jim Jubak delves into this news in order to determine action, if any, that investors should take.

All you need to draw a trend line is two points, but in this case, we've not only got the two big points; Boeing (BA) and 3M (MMM), we've got a lot of others, such as Honeywell (HON), so the trend that we're looking at is, in the announcement from Boeing and from 3M, is huge increases in dividend payouts, so Boeing raised its dividend by 50%, 3M raised its by 35%, and then, on top of that, huge increases in stock buyback.

Boeing said it's going to institute a new buyback program and buy back $10 billion dollars worth of stock; 3M, a day later, on December 18, said, "Oh, well, how about $22 billion dollars." The question is really what's going on and how healthy is it. One of the things that's going on is that money is cheap, so, therefore, companies don't have to worry about, "Well, if we pay out too much, we'll run out of cash." They can always go to the market and borrow at relatively low rates.

Second, is that, while we've got decent growth in this economy, it's not hand over fist growth, so the question is, how you find good opportunities to invest in? And some of these companies are legitimately saying, "Well, you know, we don't see a lot of investment opportunities, so we'll return money to shareholders," which is what they should be doing.

The third reason, and this is the one that kind of worries me going forward, if not immediately, is that you're seeing a lot of companies decide that they need to leverage themselves more; 3M, for example, has a very low leverage, so if they have to add debt to do this payout, that's fine, because again, as I say, debt is really cheap right now. The problem is, this is really financial engineering. This is manipulation of earnings. This is not real growth, this is financial gamesmanship generated growth, so, as you lower the share count, your earnings per share go up, because you're spending the same amount of earnings over fewer shares. IBM (IBM) is playing this. The thing about this is that, it goes on for a while and then people start to say, "Hey, well, what about your top-line growth?" I mean, IBM has reported falling top line growth. That's falling revenues, falling sales, for five or six straight quarters. At that point, people say, "Oh, okay, so all you're really doing is, you're disguising the fact that you've got a growth problem, by doing this financial engineering." If you extrapolate that across the economy as a whole, it has kind of nasty implications, because what you're really saying is that, "Hey, there's not a lot of growth out there anywhere for anybody," and that's not a good sign for the stock market or the economy.

This is Jim Jubak for the Video Network.

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