Why IBM continues its share buyback strategy



Disappointing 3Q14 results

IBM (IBM) earned an earnings per share (or EPS) of $3.68. It was below analysts’ expectations. Analysts expected EPS of $4.32. In its 3Q14 results, IBM also announced that it doesn’t have the goal for EPS of $20 or more in 2015. The goal was stated in its “2015 Roadmap.” The main reason behind the announcement was management’s acknowledgement that the industry is shifting quicker than it expected.

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If IBM has good earnings in the future, it will benefit the NASDAQ Technology Dividend Index Fund (TDIV), the Dow Jones Industrial Average ETF (DIA), the iShares U.S. Technology ETF (IYW), and the VanEck Vectors Wide Moat Research ETF (MOAT). These exchange-traded funds (or ETFs) have high exposure to the company.

2015 roadmap

IBM returned $2.8 billion to shareholders through $1.1 billion in dividends and $1.7 billion in share repurchases. Hewlett Packard (or HPQ) and Cisco Systems (or CSCO) are also leading players in the technology space. They’re suffering from flat revenue growth. However, they still have decent free cash flow (or FCF).

Huge amount spent on dividend and buybacks

Dividend distribution is rare in the technology space. However, IBM raised its dividend for the last 19 consecutive years. Since 2006, it spent ~$111 billion on share buybacks and ~$23 billion on dividends. This $134 million pushed IBM’s share price in the past. The stock market and investors continue to see share buybacks as being positive.

Cash and debt position

As of 3Q14, IBM holds cash and short-term investments worth ~$9.6 billion. It has total debt of ~$45.7 billion. IBM has substantial debt on its books. It used the debt to fund share buybacks and dividends.

Decent cash flows

Even with no revenue growth, IBM generated FCF of $2.2 billion. Investors prefer to stick with IBM because it consistently generated cash flow. IBM used the cash flow to return capital to shareholders on a consistent basis. To learn more about IBM’s earnings, please read Market Realist’s series, “Why IBM has generated higher earnings despite falling revenues.”


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