Qualcomm engineers its financial product

On the day of its annual meeting in San Diego (March 9), Qualcomm announced a a plan to buy back $15 billion of its common stock. It still has $2.1 billion stock it can buy back under a previous buyback authorization. The company will buy back $10 billion of its stock within the next year.

Qualcomm also announced a 14 percent increase in its common stock dividend, raising the annual payment to $1.92 a share. Qualcomm has not had great news of late (it will pay a huge fine in China), and it figures it will appease shareholders.

Stock buybacks are considered quintessential financial engineering. A company can use cash on hand or borrow money for a cheap interest rate to buy back its own stock. This reduces the number of shares outstanding and artificially boosts earnings per share. Generally, the stock will move up. Critics say this money should be spent on production of goods and services — not manipulation of earnings per share.

Think of it this way: today is the anniversary of the beginning of the six-year bull market. Corporate profits have hit new records but world economies have been very weak, particularly for a post-recession recovery period. So, why have earnings been so strong? Part of the explanation lies in automation improvements and other economies. But the bulk of the explanation is financial engineering. In this six-year bull market, earnings have soared because they are being manipulated through financial engineering ploys.

(This doesn't mean I am abandoning stocks. I am still buying them because the returns on alternatives — bonds and cash — are so anemic.)