Business Booming, IBM Jacks Dividend, Share Buybacks

Published: May 2, 2011

by Timothy Prickett Morgan

The IBM money machine continues to perform as it has been engineered to do, and predictably at Big Blue's annual shareholder meeting last week in St. Louis, Missouri, the company announced that the board of directors had bumped up the company's quarterly dividend as well as authorized the company to spend another $8 billion buying up its own shares down on the New York Stock Exchange.

The dividend was bumped up to 75 cents per share per quarter, a 15 percent rise since the dividend was increased almost exactly a year ago to 60 cents. IBM was bragging that this is the 16th year in a row that it has boosted the dividend, and the eighth year the increase has been in the double digits. Since 2003, the dividend has quintupled, in fact, and with each year, it gets harder for IBM to make successively larger increases in the payout to shareholders without eating into the cash the company wants to use to buy back stock on the open market.

Not that stock buybacks are getting any cheaper either, mind you. Not with IBM's shares trading at nearly $173 as The Four Hundred goes to press on Friday. IBM has 1.21 billion shares outstanding and a market capitalization of $209.2 billion, so it is going to take a lot of cashish to make a dent in that.

"Since 2003, we have returned over $100 billion to shareholders in the form of dividends and share repurchases, while continuing to invest in capital expenditures, acquisitions, and research and development," Sam Palmisano, IBM's president, chief executive officer, and chairman said in a statement. "Our commitment to delivering value to our shareholders remains as important today as it has ever been."

To that end, IBM's board authorized Big Sam to go down to Wall Street with another $8 billion to buy back shares this year, adding to the $4.7 billion in authorizations it already has. And, IBM's top brass are expected to ask for even more money for buybacks at its October board meeting.

At its peak in 1992, IBM paid $1.21 per quarter in dividends and did not do stock buybacks; the company did do some stock splits over the years, with a biggie in 1968, when IBM shares were trading at $688 a piece and Big Blue was the most valuable stock--and by a longshot--on the NYSE. At the time, IBM had 60 million shares outstanding. That $12.7 billion in current authorizations will, if IBM's share price continues to rise towards $200, vacuum up only somewhere north of 60 million shares.

As usual, I keep thinking of what IBM might better do with all of this money, but so long as Wall Street is focused on earnings per share growth and IBM's managers are compensated for this metric, then IBM will not change its behavior. I think it would be interesting to see what would happen if IBM said to hell with EPS growth and told everyone it would conserve cash for acquisitions and a cushion against downtimes and distribute most of its annual hoard as a dividend. But you can see how this would fail immediately. Between now and the end of the year, if IBM's shares rise to $200, then IBM's managers and other shareholders will be sitting on an extra $25 or so per share. And if you look at the stock since it hit a low of $116 within the trailing 12 months, then you are looking at something like an $84 per share gain. Provided IBM doesn't screw up its business, that share gain is like money in the bank, and much better than the inflation rate or interest rates. If IBM distributed the entire $12.7 in share buyback authorization for 2011 as a dividend, you're talking about only $10.50 per share.

I would much rather IBMers cut Power Systems-IBM i customers a break on pricing and modernize the customer installed base. Or, heaven forbid, actually spend a little money to expand it. But given the stock and dividend numbers above, you can see why IBMers are obsessed by pumping up the stock through financial engineering instead.

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