Tuesday, February 26, 2008

IBM Thinking?

IBM (IBM) excited the markets by announcing a $15 Billion share buy back. Trading near its 52 week high the timing seems right to drive the valuation higher. (Read executive stock option) As we all get excited about what is most likely a fundamentally good story lets ask a few questions.

The $15 Billion is somewhat in excess of one years annual profits. Although the dividend has been increasing, it currently trades around 1.39% dividend yield. Income investors are probably not rushing to tie this one up. If you believe share prices go up because more people want to buy than sell why not increase the dividend and attract long term buy and holds.

The most telling metric in my view: The $15 billion buy back is more than double last years R&D budget. IBM a technology company that leveraged the concept of “THINK” is now spending more money on financial engineering than on R&D.

Enjoy the ride but how far can this strategy take you?