IBM Stock Buybacks Reduce Share Count Below 1 Billion

(Corrects in third-to-last paragraph in story dated July 18 to show repurchases aren’t included in free cash flow.)

IBM shares are getting scarcer as the company acquires its outstanding stock, making each share of the company more valuable.

International Business Machines Corp. (IBM)’s repurchases reduced the company’s share count to 998 million at the end of June, the first time it’s closed a quarter below 1 billion since at least 1999, when it last split its stock. The company, led by Chief Executive Officer Ginni Rometty, spent $3.7 billion on buybacks in the three months starting in April. Fewer shares in circulation means more profit for each piece of stock, helping earnings per share go up even as the company’s revenue declines.

Rometty has kept herself bound to a financial road map designed by her predecessor to reach at least $20 a share in adjusted earnings by 2015. Nine straight quarters of falling sales have forced her to look elsewhere to reach that goal. With the second-quarter buybacks, IBM has surpassed the $50 billion in repurchases the company projected in 2010 that it would spend through 2015.

“Buybacks have obviously been a nice part of the story,” said Amit Daryanani, an analyst at RBC Capital Markets. He has the equivalent of a hold rating on the shares.

Even before the second-quarter results, IBM had one of the lowest share counts among similarly sized companies. Of the 41 companies around the world with a market value of $150 billion or more, IBM ranked 36th in shares outstanding, according to data compiled by Bloomberg.

The increasingly exclusive club of IBM investors is led by Warren Buffett, the billionaire investor whose Berkshire Hathaway Inc. is the company’s biggest shareholder, with a 6.9 percent stake.

Big Data

Rometty is managing IBM through a shift in corporate spending that has dragged on her company’s revenue. Technology customers are increasing moving data and software to the cloud, instead of on servers on-site, lessening the demand for IBM hardware and the sales and maintenance staff who support it.

To cope, Rometty has turned IBM’s focus to areas like cloud services, big-data analytics and mobile computing. So far, the promise of those growing investments hasn’t been enough to make up for the decline of older businesses.

In the second quarter, revenue fell 2 percent from a year earlier to $24.4 billion. Still, declines for products like mainframe servers and for sales in emerging markets were less severe than earlier this year, helping Rometty move closer to her profit goals.

IBM shares were little changed at $192.50 at the close in New York. They have gained 2.6 percent this year, aided by the buyback campaign. That compares with a 7 percent gain in the Standard & Poor’s 500 Index.

Lower Rate

In April, IBM had said it wouldn’t sustain its rate of share repurchases, which reached $8.2 billion in the first quarter, the most since 2007. The buybacks were about 37 percent more than the company spends annually on research and development.

At the time, the company said it planned to spend less than $5.8 billion total in the final nine months of this year. After the second quarter’s results, that means it has about $2.1 billion remaining in the budget for the rest of 2014.

In the second quarter, IBM improved its free cash flow, which climbed to $3 billion from $600 million in the prior period. The company said yesterday it still expects $16 billion this year in free cash flow, up from $15 billion last year. Free cash flow doesn’t include buybacks.

The repurchases, meanwhile, have taken a toll on IBM’s balance sheet. Total debt climbed to $44 billion in the second quarter, up from $39.7 billion a year ago. IBM had a cash balance of $9.7 billion at the end of the period, down from $10.4 billion.

“The long-term ability to keep doing the buybacks could diminish if you don’t see free cash flow spike back up,” Daryanani said.

To contact the reporter on this story: Alex Barinka in New York at abarinka2@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net Crayton Harrison, John Lear

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