Poster Children

IBM, Coca-Cola and McDonalds are three of America’s largest corporations and most well-known brands. They are true multinationals in every sense of the word and they dominate their industries both at home and abroad. They are numbers 23, 58 and 106 on the Fortune 500 list, respectively. Together, they make up 12 percent of the Dow Jones Industrial Average’s total weighting.

And all three are plagued by the same problem – they’re shrinking. More than this, their shrinkage is finally being recognized on The Street, now that investors are peeling back all of the layers of buyback and dividend subterfuge that’ve kept this fact disguised for so many years.

McDonalds has been trading like a bond for the last two years, oscillating within a tight ten-point range between 90 and 100 dollars a share, a 3-and-change percent dividend along with a buyback keeping it afloat almost regardless of how poorly its margins and same store sales have come in. Not anymore. This morning it told Wall Street that earnings in the last quarter are down by an unbelievable 30 percent. No more bond-like status for Mickey D – and indeed, the stock looks to trade below the $90 level for the first time since January of 2013. As McDonalds raises prices on fancier offerings, they run into new competitors at the higher tier. As they fight to maintain their economically absurd “Dollar Menu”, they collapse their own margins. It’s not unfixable, but it’s a bad situation. On top of that, all of the marketing in the world cannot change the fact that the current McDonalds product and experience is socially unacceptable to what used to be the company’s core audience. I don’t know anyone who would feed their kids that stuff or bring a greasy sack of it up to their office these days.

Coca-Cola’s core business, diet and regular soda, is dead. Everyone knows it except for shareholders, who’ve kept the stock near 52-week highs regardless of the massive shift in consumer tastes away from sugars, preservatives, artificial ingredients and unhealthy soft drinks. They’ve been shareholder-friendly on management incentives, dividends and buybacks as well – but it may not be enough anymore. Coca-Cola is not growing and its core product has become increasingly meaningless to the next generation of consumers. This morning Coke reported an awful quarter to investors, its shares are off almost 6 percent as of this writing. That’s an exceptional decline for a such a traditionally boring blue chip – another “bond-like stock” now forced to face the music.

Which brings me to IBM – perhaps the very poster child of this moment in buybacks-trump-anything investing. IBM has spent $140 billion since the year 2000 on dividends and buybacks. Which has been great for shareholders, but not so great for the business: IBM has missed out on or underinvested in every single major trend within the technology space for the last decade. And now those chickens are coming home to roost. Management has dropped the Beijing-inflected “five year plan” nonsense finally and may have finally been scared straight into investing in innovation again. Is it too late? Has the price to sit down at the table gone higher than it would have had IBM been more aggressive sooner?

Buybacks have far outpaced revenue growth for the US stock market in the modern age and these three companies are emblematic of what that looks like as the fairy dust begins to wear off. What this could mean for a host of other stocks going forward is not encouraging.