Wednesday, April 27, 2011

Dividend Watch: IBM Smart Move, Also Not So Smart Move (IBM)

International Business Machines Corp. (NYSE: IBM) is the largest Dow Jones Industrial Average component by far due to its share price.  If it was based on market capitalization like most indexes, IBM would rank fifth in the DJIA weighting.  News this morning of a higher dividend and an increased share buyback plan is helping to drive shares a bit more.  We view this morning’s news as part-genius and part nonsense.
IBM’s new dividend is $0.75 per common share, payable on June 10, 2011 to holders of record May 10, 2011.  This dividend hike is a smart move and frankly is something we would have liked to see even more of.  The payout is $0.10 higher, a jump of about 15%.  This was the good move.
The “bad move” by our take today is that IBM boosted its “other dividend”…. It increased the common stock repurchase plan by authorizing an additional $8 billion.  The company noted specifically that this additional $8 billion is in addition to about $4.7 billion it had remaining at the end of March from its prior share buyback plan still under authorization.
IBM did counter our ‘nonsense’ view by stating ahead of time that it “expects to request additional share repurchase authorization at the October 2011 board meeting.”
The new dividend payout comes to nearly 1.8% in a dividend yield.  The $12.7 billion or so that the company now has in total authorization for repurchase after this morning’s jump compares to a market capitalization rate of about $205 billion.
So, why is this nonsense for buying back stock?  Investors generally operate under the gumption that companies want to repurchase their shares when things have been tough as a mechanism of support.  Of course that is not always the case.  Still, this comes at a time when IBM shares are at historic highs.  This gives credence to a cynical view that maybe IBM is the only one left who wants to buy more IBM stock.
IBM could be using its cash to acquire more bolt-on companies or units of companies rather than simply shrinking its float.  IBM could trade at 6 times earnings and it would still be too large for an acquirer.  How many entities can write a $200 billion check?  Very few, or more likely none.  IBM doesn’t have to shrink its float because there are no predators due solely to size.  Investors might feel the buyback is a good return of capital, but more sophisticated investors might be thinking that this is a move to support the stock at all-time highs rather than a move to buy growth for the generation ahead.
IBM recently showed that its order backlog is a whopping $142 billion.Its most recent gross margins were reported as being 44.1%, and it had free cash flow of $800 million in the last quarter.  If IBM decided to stop buying back its stock it would be able to grow its cash even further, and then it would not have to dilute its share count ahead.  Many argue that this is six-of-one or a half-dozen-of-the-other. Maybe it is.  Still, we’d rather see companies using capital to increase dividends rather than to buy back stock at all-time highs.  We’d even rather see larger one-time dividends over share buybacks at all-time highs.
IBM shares hit an all-time high of $169.20 today and the stock is up 0.65% at $168.75 so far this morning.  Volume is not exactly stellar with about 3.4 million shares having traded hands mid-day.

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