Warren Buffett stunned the investment community again by announcing that Berkshire Hathaway (NYSE:BRK.A) has accumulated a $10.7bn stake in IBM (NYSE:IBM). Over the last half year, Berkshire bought roughly 64 million shares at an average price of $170. With shares trading briefly over $190 Monday morning, Berkshire Hathaway made a cool $1.2bn on its investment.
Not his style
Yet the purchase comes as quite a surprise. Buffett normally only buys stakes in companies who provide old-fashioned services which he can easily understand such as papers companies, food producers, insurance providers, banks, utilities and railroad services.
Furthermore Buffett is known for stepping in when firms are in trouble, when other investors are too scared. Just recently he made a massive deal with Bank of America (NYSE:BAC) when it came under fire.This is certainly not the case with IBM which has been trading in a $70-$130 trading range over the last 10 years. A year ago, the stock managed to break towards the upside and continued a steady pace upwards hitting all time highs along the way.
Why is Buffett stepping in?
- Berkshire has vast amounts of cash and simply has to look for larger stocks to invest in.
- IBM has successfully transformed itself from a volatile technology company into a more predictable tech-related service company with stable cash flows and lower reinvestment needs.
- Buffett's likes the management under J. Palmisano who led the transformation over the last decade and has set aggressive, shareholder friendly targets. IBM is targeting earnings per share of $20 for 2015 ($11.5 in 2010). Over the period the company hopes to generate $100bn in free cash flows.
- The company is committed to reward the shareholders. Dividends have doubled from $1.50 per share to $3.00 per annum in just 4 years. Furthermore it authorized another $7bn in share repurchases just last month. From 2003 until now the company has returned over $100bn to shareholders. Buffett is betting it will pay out a similar amount in just 4 years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.