IBM Boosts Share Buybacks And Dividend

April 30, 2012 Timothy Prickett Morgan

This was about as predictable as tomorrow’s sunrise. IBM‘s top brass are feeling so good about its financial prospects this year that it has once again raised its dividend and asked for and received approval from Big Blue’s board of directors to spend huge piles of cash buying back stock.

In a statement last week, new president and CEO, Ginni Rometty, said the board has approved another $7 billion to be spent on share buybacks, adding to an existing authorization from last year that still had $5.7 billion left in the kitty.

“We continue in our commitment to deliver value to our shareholders,” Rometty said, and if I didn’t tell you, you might have thought that Louis Gerstner or Sam Palmisano, the two previous CEOs at the company and also eager share repurchasers, had said that. “Since 2000, we have returned over $137 billion to shareholders in the form of dividends and share repurchases. At the same time, we continue to invest in capital expenditures, acquisitions and research and development, to keep IBM at the forefront of innovation.”

I was stunned by the fact that IBM has retired about a third of its shares since 2000 through buybacks, and did some quick guesstimating and figured that IBM might drop in half again from the 1.16 billion shares outstanding in the next decade. At this rate, in two decades or more, IBM won’t have much of a public float left and will have to go public all over again. If IBM’s shares double in value in the next decade and it buys back half of them, it will end up with the same $230 billion or so market capitalization it has today. And it will have given IBM shareholders some income that is taxed at a capital gains rate instead of a proper income rate. It’s good work, if you can get it. And unless you are a bigtime investor, it just won’t pay off for you.

IBM has also raised its dividend by a dime per quarter to 85 cents a share, or $3.40 per share per year, which is a 13.3 percent increase from the prior rate. Back in 1968 when the IBM System/360 mainframes were computing, for all intents and purposes, IBM was paying out $4.54 a share in dividends (something akin to $30 a share if you adjust it for inflation) and the stock peaked at $688 ahead of a massive split, when IBM doubled its share count to 120 million. That share price, adjusted for inflation, was equivalent to around $4,500 today.

IBM was an aggressive monopolist with questionable business and technical practices that ran afoul of the United States antitrust authorities, and that’s not cool. But that does not take away from the engineering foundations that IBM laid for the modern computing industry and all the advancements and endorsements it gave to myriad technologies over the years. I just happen to think that IBM should treat customers to lower prices and grow its base more than I think it should reward upper management with mountains of shares that make them rich, like Wall Street power barons. But knowing me, you would expect me to say that, wouldn’t you?