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An Alternative To Money Market Funds

July 2014

Stock buybacks by major S&P 500 companies have made some headlines during 2014. On July 17, IBM reported 2nd quarter earnings of $4.32 per share, a penny above consensus estimates. Analysts were disappointed with these results since this marked the 9th straight quarter that IBM saw revenues decline.

The slightly better than expected quarterly profit was boosted by continued cost cutting and stock buybacks. In fact, for the first time in years, IBM’s share count (basic not diluted) now stands at less than one billion shares outstanding. IBM’s debt load has increased substantially in recent years using part of these borrowed funds to boost earnings per share while reducing the share count via stock buybacks. Experienced investors know that the “quality“ of earnings matters. Generating improved quarterly results via stock buybacks only masks the decline in IBM’s existing business.

Stock buybacks can also serve investors well. For example, on March 31, AT&T’s Board authorized an additional buyback of up to 300 million shares. This authorization is in addition to three other 300 million share buyback authorizations announced previously. AT&T has about 5.2 billion shares outstanding.

In the March 31 Press Release, AT&T said it has repurchased 775 million shares since these authorizations were made beginning in 2010. Thus, there is ample room to repurchase substantially more shares. There is no expiration date for these stock buybacks. And there is always the possibility that AT&T’s Board will authorize additional buybacks.

AT&T’s share repurchase plan will come in handy as its acquisition of DTV approaches completion next year. Back on May 18, AT&T announced it would acquire DIRECTV in a cash and stock transaction for $67.1 billion including the assumption of debt. AT&T is paying $28.50 per share in cash and $66.50 in AT&T stock. The stock component is subject to an agreed upon collar ranging from $34.90 to $38.58 per share.

Thus, AT&T will issue fewer shares to holders of DIRECTV at closing if AT&T’s shares are trading @ $38.58 or more. And AT&T will issue more shares if it is trading below $38.58 at closing with the range capped at the $34.90 end of the trading collar. So, it is in AT&T’s interest to keep its share price elevated as the deal’s completion approaches next year.

With that in mind, our clients purchased shares of AT&T @ $35.50 on June 24, days before  the AT&T Board of Directors declared the 46c per share quarterly dividend. The record date for the dividend was set by the Board as July 10 and the dividend will be paid August 1. We later sold the shares @ $36.05 on July 15.

Including the pending 46c dividend, this transaction generated a return of 2.8450% in one month. Annualized, this transaction returned 34.14% (e.g. 2.8450% x 12 months). If you are unhappy with the returns now offered by money market funds feel free to contact us.

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