IBM Boosts Stock Buyback by $7 Billion, Raises Dividend

IBM Boosts Stock Buyback Plan by $7 Billion, Raises Dividend
IBM is making progress with a plan to increase software, which is more profitable than hardware, to account for half of earnings in 2015 as businesses and governments boost spending on programs that analyze data and project trends. Photographer: Scott Eells/Bloomberg

International Business Machines Corp., the world’s biggest computer-services provider, boosted its stock-buyback plan by $7 billion and raised its dividend to return cash to shareholders as earnings increase.

The quarterly payout will rise 10 cents to 85 cents a share, IBM said today in a statement before a shareholder meeting in North Charleston, South Carolina. IBM had $5.7 billion remaining from a previous buyback plan, bringing the total available for repurchases to $12.7 billion.

IBM is increasing profit by focusing on higher-margin software and services, a strategy that has allowed it to boost payouts to shareholders each year for more than a decade. The company’s buybacks have reduced its share count by a third since 2000, helping IBM lift its earnings per share and stock price and winning praise from investors including Warren Buffett.

“A key driver behind the increased share buyback and larger dividend is that IBM’s software growth continues to grow at or above market,” Mark Moskowitz, an analyst at JPMorgan Chase & Co. in San Francisco with an overweight rating on the stock, said today in a note to clients. “Today’s news signals no pullback in its shareholder-friendly focus.”

IBM rose 0.7 percent to $200 at the close in New York. The Armonk, New York-based company’s stock has more than doubled in the past five years and closed above $200 for the first time last month, factoring in stock splits.

Rometty’s Strategy

IBM is making progress in a plan to get half of its earnings from software, which is more profitable than hardware, within the next three years. Businesses and governments have bolstered sales by buying programs that analyze data and project trends. Chief Executive Officer Virginia “Ginni” Rometty, who took over in January, is also seeking to expand in faster-growing economies.

Rometty, speaking to investors at the meeting in North Charleston, said she has met with more than 100 CEOs in the past couple of months and visited countries all over the world to expand the company’s business. Companies and government agencies are seeking IBM’s help to tap so-called big data -- the vast stores of information spread out across networks.

“That new generation of leaders is absolutely convinced that analytics applied to this new big era of big data, will be critical to their success,” Rometty said. “The ability to help them capture that opportunity is what’s opening up IBM to many new types of clients -- be that mayors, be that health-care leaders or chief marketing officers.”

Golf Controversy

Formerly IBM’s sales and marketing head, Rometty, 54, succeeded Sam Palmisano and became the first female CEO in the company’s 100-year history. Palmisano, who had been CEO since 2002, remains chairman.

At today’s meeting, the first live question Rometty faced was regarding a conflict between her and Georgia’s Augusta National Golf Club men-only membership policy. A shareholder inquired whether the club had admitted her as a member.

IBM is one of the sponsors of the Masters Tournament, held at Augusta National, where no woman has been offered membership since its founding eight decades ago. Historically, the club has offered a membership to the CEO of IBM, allowing him to don the club’s green member blazer.

“I’m certainly very happy about our CEO and be anxious to know if she’s a member of Augusta?” the unidentified male shareholder asked today. “No response is required,” he added.

Rometty didn’t answer while the room was filled with laughter. Palmisano, standing next to her on the stage, thanked the shareholder for the “very kind comment.”

“We were all curious as to when that would come up,” Palmisano said. “But thank you again. Can I have another question, please?”

Buffett Praise

Buffett, who spent more than $10 billion building a stake in IBM at his Berkshire Hathaway Inc., in February commended the computer-services company’s former CEOs Lou Gerstner and Palmisano for boosting investor returns.

“I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders,” Buffett, 81, wrote in a letter to shareholders of Omaha, Nebraska-based Berkshire. “The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock.”

Contrary to popular opinion, the bet will do better if the stock swoons for the next several years, allowing IBM to buy back a greater percentage of the stock, Buffett said. That would increase Berkshire’s ownership and share of future IBM earnings, the billionaire said. Berkshire held about 64 million IBM shares, or more than 5 percent of the company, as of Dec. 31.

More Acquisitions?

Rometty inherited a five-year plan that targets annual operating earnings of at least $20 a share by 2015, up from $13.44 last year, by growing technologies, acquisitions and share buybacks. IBM is tapping a “gusher of data” through its Smarter Planet and Smarter Commerce initiatives to achieve its 2015 growth targets, Rometty said in her first letter to shareholders in the 2011 annual report.

The company last week raised its full-year earnings forecast after posting a 7.1 percent increase in first-quarter profit, helped by software margins. Operating earnings will increase to at least $15 a share this year, IBM said April 17, boosting its January forecast of at least $14.85.

IBM has set goals of adding $20 billion in new revenue and spending about $20 billion on acquisitions, from 2010 through 2015, as it expands offerings to business customers.

The increased dividend and buybacks still leave IBM with billions of dollars for potential takeovers or asset purchases, said Eyal Ofir, an analyst at Canaccord Genuity in Vancouver, who has a hold rating on the stock and a price target of $205.

“They still have significant amounts of cash left for acquisitions,” Ofir said. “This is a positive.”


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