Is IBM Thinking?

IBM (IBM) excited the markets by announcing a $15 Billion share buy back. Trading near its 52 week high, the timing seems right to drive the valuation higher. (Read executive stock option) As we all get excited about what is most likely a fundamentally good story, let's ask a few questions.

The $15 Billion is somewhat in excess of one year's annual profits. Although the dividend has been increasing, it currently trades around 1.39% dividend yield. Income investors are probably not rushing to tie this one up. If you believe share prices go up because more people want to buy than sell, why not increase the dividend and attract long term buy and holds?

The most telling metric in my view: The $15 billion buy back is more than double last year's R&D budget. IBM, a technology company that leveraged the concept of “THINK”, is now spending more money on financial engineering than on R&D.

Enjoy the ride, but how far can this strategy take you?

Comments

[deaverb:]

Excellent article--putting the issues on the table. A strong buyback program, without a big options program for execs (largely unnecessary and certainly expensive), makes sense for IBM. They are the classic "blue chip" generating an awesome cash flow, in services that requires less investment than the traditional IBM businesses.

The writer thoughtfully points out that this is where IBM is--not the R & D company of the past.

2008 Feb 27 08:05 AM

[kg's:]

They use to be a great company before GREED got to the corporate structure. An retired 30+ year employ.

2008 Feb 27 08:33 AM

[nycguy:]

Er ... lets also point out how IBM's existing R&D budget dwarfs any of their competitors. And that its holds the maximum number of patents year after year. R&D at IBM is working. Just because its spending more on financial aspects, does not mean it takes away from its R&D.

2008 Feb 27 05:28 PM

[TPjrNiwot:]

IBM is smart to buy back shares rather than increasing dividends. It defers taxation for stockholders and shifts the increased value to capital gains. Simple as that. They can increase R&D any time. Buying SW companies is the same thing for them - and is working. Don't encourage them to screw up a financial model that is working like a charm.

2008 Feb 27 10:44 PM