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IBM gooses dividend, share buybacks

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It's been so long since IBM has seen a stock split, Wall Street has probably forgotten that it's even possible. But you can bet Sam Palmisano's last dollar that Big Blue is itching to do one, and by boosting its dividend and announcing yet another massive share repurchase campaign, it's one step closer perhaps to its first stock chop in a decade.

A stock split is like free money in a way, since in the late 1990s there was a psychological tendency to push IBM's stock towards $100 if the company is making a reasonable amount of money and not getting its ass totally kicked by competitors. (Like it did in the early 1990s).

Yes, that is profoundly stupid. Welcome to Wall Street, the gambling casino where we stash our retirement funds and let idiots and savants do obscene things with them as they wreck economies on their way to wealth and power.

IBM certainly has its share of both. Enough that today it goosed its quarterly dividend by 10 cents a share, to 65 cents, an 18 per cent boost.

IBM, you will recall, has been paying quarterly dividends since 1916, when IBM went public on the New York Stock Exchange. That's a pretty good stretch. But don't be too impressed. In 1992, when chairman John Akers was shown the door after a massive misreading of demand for mainframes, not appreciating the impact of Unix and PCs, and so many other screwups, IBM was paying $4.84 per share per year in dividends. We're up to $2.60 per share at an annual rate, and if I were an IBM shareholder, I would be expecting Big Blue to stop messing around with share buybacks to financially engineer earnings per share growth and give me the cash instead.

But IBM doesn't want to hear any of that kind of talk.

"Our superior cash flow enables us to invest in the business and generate substantial returns to investors," explained Palmisano, IBM's president, chief executive officer, and chairman. (Or rather, someone in the investor relations department explained when they wrote the press release). "Since 2003, more than $80 billion was returned through dividends and share repurchase. Our commitment to delivering value to shareholders has never wavered."

The vast majority of that money went to share buybacks, which Big Blue uses to prop up EPS and also to award stock to employees as a form of compensation. But one could argue that shareholders would have been a lot happier if IBM just gave them the billions instead of just a little taste. But Wall Street likes a stock that is rocketing, not one that is steady, because you can get richer quicker.

And so, IBM executives, who are compensated largely in stock, are compelled by the system to do everything they can to pump the stock. That includes continual layoffs under the radar of regulators and the press; offshoring manufacturing, software development, and support operations; and shelling out billions each quarter to eat those shares to show EPS growth.

Hence the additional $8bn in share buybacks that IBM's board also authorized today.

The other reason was to try to push IBM shares up, as the financial results for the first quarter, announced last week, did not. While IBM's earnings were up 13 per cent, to $2.6bn, in the quarter, revenues grew a more tepid 5 per cent, to $22.9bn, and both were against easy compares, given the economic meltdown was raging at the time last year. During his chat with Wall Street analysts discussing the quarter, Mark Loughridge, IBM's chief financial officer, did not paint a particularly rosy or bland picture of the IT market, and therefore, IBM's share price has been languishing in the $130 zone. The shares actually lost a half point on the announcement - go figure.

IBM likes to do its stock splits in May, as this history of splits shows, and the company likes for the stock to be trading in a much higher place than it is now. IBM last split its stock on May 27, 1999, kinda the last hurrah of the dot-com boom. IBM did another one two years earlier, but not a single one in the 1980s and early 1990s because IBM's shares languished along with the economy. IBM did two splits in the 1970s: one in 1979, a one-to-four split, and another in 1973, a four-to-five split, when its mainframe businesses allowed it to plow right through awful economies. IBM did six splits between 1959 and 1968.

The problem IBM has is that having a stock well above $100 is not odd. Google and Berkshire Hathaway are two very pricey stocks that don't split themselves down to $100 or less, and they have a certain amount of cachet. In fact, as you will note in this Time article chronicling the May 1968 split, IBM was for several decades the most expensive stock on the NYSE, rising from $320 a pop a few months before the split to $688 in the days ahead of the split. IBM was trading at 59 times 1967 earnings at that point, and in a recession, like now.

The 60 million shares being turned into 120 million shares worth half as much was, at the time, the largest share redistribution in history. IBM used to be Google, and back in 1968, it was paying $4.54 a share for dividends. And IBM did it all as a manufacturer of capital goods with high capital costs of its own, not a glorified data center operator with a bunch of software geeks and mathematicians against some comparatively low costs.

If IBM continues to grow and maybe breaks $150 a share, perhaps the board of directors will give Palmisano a going away present of a stock split when he retires next year. ®

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