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IBM juices dividend (yet again)

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With rival and former fiancée Sun Microsystems reporting its what are sure to be embarrassing financial results later today, today is a perfect day for IBM to rub it in extra hard. So Big Blue has announced it is boosting its dividend, while allocating another $3bn to buying back its own shares.

Today is also quarterly announcement extravaganza day, with the recurring theme of Dynamic Infrastructure, which IBM has been going on and on about like it used to with eBusiness and then OnDemand. So it is a good day to brag about money. For what IBM will shell out to buy shares this year, it could have easily bought Sun Microsystems and cut it back to profitability.

But it is far easier and infinitely more predictable to generate cash from its monopolies and legacy platforms and then use it to buy its earnings per share growth than it would be to acquire Sun and merge the business into Big Blue in a profitable way. Now Oracle gets to give it a try, and there is an outside chance that Oracle gets it right and starts hammering away at that IBM profit engine with some earnest. Somebody has to. That's capitalism, after all.

Anyway, IBM's board of directors took a vote this morning, and they approved a 10 per cent increase in Big Blue's quarterly cash dividend, boosting it to 55 cents a share. This is the 14th year in a row that IBM has increased its dividend, the company bragged, adding that the dividend has risen by 175 per cent since 2006 and that when it pays this dividend to shareholders of record on June 10, the company will have been paying quarterly dividends to shareholders since 1916. The companies that became IBM were originally started back in 1889, and IBM itself was incorporated in 1911. It went public in 1916 on the New York Stock Exchange, quickly became one of the anchor companies of that exchange.

"IBM's model of profitable growth and strong cash flow enables the company to continue to deliver value to our shareholders," explained Sam Palmisano, IBM's president, chief executive officer, and chairman in a statement. "We demonstrated this commitment by returning $2.5 billion in the first quarter through dividends and share repurchase, and our continued solid performance allows us to increase shareholder return, as we are doing today."

What IBM did not mention in its announcement was that its annual dividend was set at $4.84 per share in 1992 and that it had been cut down to $1 per share in two massive cuts - one by outgoing chairman John Akers in late 1992 when his head was on the chopping block as IBM's mainframe business collapsed and nearly bankrupted the company, and another by IBM's savior, Louis Gerstner, a few months after he took over and Akers was sent packing.

While IBM can brag about its dividend - particularly because so few IT companies distribute profits this way, cheapskates and cynics that they are - it is nothing at all like the glory days of Big Blue. Best I can figure, it is early 1993 in dividend time, and we have a long way to go before we even get anywhere close to 1992's levels. Like never, for instance, unless IBM decides to take over a government somewhere.

IBM's board dutifully gave IBM's top brass permission to shell out another $3bn in cash this year for stock repurchases, and there is $3.7bn in the kitty from prior share buyback allocations. With this money alone, IBM could have acquired Sun and had about $1bn left over. Of course, that would be a double whammy on its profits, since Sun is inherently unprofitable right now and IBM can't stop buying back its shares if it wants to show EPS growth, since its earnings are flat or declining slightly in real dollars. IBM says it can hit at least $9.20 in earnings per share this year, and that is going to take some serious share repurchases.

Buying your shares might be a good thing to do for a lot of reasons, but it is a habit that can be very hard to break unless the business is growing fast and throwing off much more cash than usual. That doesn't sound like the IT business or Big Blue in early 2009. That's for sure. ®

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