IBM Approves Dividend and Share Repurchase Program

IBM (IBM) increased the quarterly dividend to $0.40 representing a 33% increase, paralleling the appreciation in share price over the past 18 months. Yield is back to 1.6%. The more interesting news is that IBM intends to increase long term debt and buyback $15B worth of stock, or roughly 10% of outstanding shares.

In a previous article (to clients; before we started posting to the website) we noted that IBM had done a series of acquisitions throughout 2006 in order to offset the anticipated hardware slowdown in 2007. The software acquisitions have worked well so far, accounting for over 66% of revenues and profits in 2006. The company's guidance announced yesterday further demonstrates the anticipated hardware slowdown. Though EPS is guided to grow between 12% and 14% in 2007, over 8% will be generated by the share repurchase program.

Normally we wouldn't mention this; however the majority is being financed by long term debt. On the one hand, IBM maintains above average growth for 2007. On the other hand, in reality IBM is reducing future core EPS by increasing its interest payments. Should interest rates get out of hand, this could prove to be a wrong move. This is not our prognosis. We still anticipate a Fed reduction in 2007.

This also means that there will be fewer acquisitions in 2007. Apparently IBM can not identify reasonably priced companies to acquire. Instead, IBM has embarked on an ambitious share repurchase program. Both venues include the assumption of long term debt in order to enhance shareholder value.

Estimated EPS for 2007 remains unchanged at $6.78. Naturally this will fluctuate with the implementation (timing and intensity) of the share buyback program.

As an aside; IBM is still classified as a computer hardware company. When Wall Street changes the category, we will follow suit.

IBM 1-yr chart

Disclosure: No conflicts.