International Business Machines (IBM) was one of the 5 Upcoming Dividend Aristocrats You May Be Looking Past which I covered earlier this year. IBM is on track to have raised its dividend for 18 consecutive years at nearly 20% compounded annually and has just recently had a few percentage points shaved off its market price per share, the latter of which is exactly what Warren Buffett wants. That is right! I will shed some light on why Buffett wants IBM's share price to languish at worst and decrease at best, concluding this article with my own intentions regarding an investment in IBM.
The Background Story on Buffett and IBM
Buffett began buying shares of IBM in early 2011. According to SEC filings, he purchased nearly $720 million worth of IBM, or approximately 4.5 million shares at an average price of around $160. Let me repeat that is $720,000,000 invested in an internet/information technology company by a self-proclaimed non-investor in internet/information technology companies. But Buffett was only dipping his toe in the water because he went on to increase his holding in IBM to nearly 64 million shares by the end of 2011 for an all in average price of somewhere around $170, or a total of nearly $11 billion. Buffett has since increased his IBM holding slightly, but the majority of his purchases averaged around $170 per share, which is almost exactly IBM's 52-week low.
Buffett's Current Relationship With IBM
As of the middle of this year, IBM comprised almost 14.5% of Buffett's entire holding portfolio making IBM his third largest holding, behind 1) Wells Fargo & Co. (WFC) and 2) Coca-Cola Co. (KO), respectively ~21.5% and ~18%.
Table 1 details Buffett's top thirteen holdings by percent ownership of the shares outstanding of the company and provides their respective percent weight in his portfolio.
Table 1. Warren Buffett's Ownership as a % Of Shares Outstanding and % Of His Portfolio
Ticker
|
Company Name
|
% Outstanding
|
% Portfolio
| |
1
|
(WPO)
|
Washington Post Company
|
23.3
|
0.9%
|
2
|
(MEG)
|
Media General Inc.
|
16.6
|
0.1%
|
3
|
(USG)
|
USG Corp.
|
15.7
|
0.4%
|
4
|
(DVA)
|
DaVita HealthCare Partners Inc.
|
14.1
|
2.0%
|
5
|
(AXP)
|
American Express Co.
|
14.1
|
12.7%
|
6
|
(MCO)
|
Moody's Corporation
|
11.3
|
1.7%
|
7
| (KO) |
Coca-Cola Co.
|
9.0
|
18.0%
|
8
|
(CBI)
|
Chicago Bridge & Iron Company
|
8.9
|
0.6%
|
9
| (WFC) |
Wells Fargo & Co.
|
8.7
|
21.5%
|
10
|
(VRSN)
|
VeriSign
|
7.6
|
0.6%
|
11
|
(DTV)
|
DirecTV
|
6.8
|
2.6%
|
12
|
(WBC)
|
Wabco Holdings Incorporated
|
6.5
|
0.3%
|
13
| (IBM) |
International Business Machines
|
6.2
|
14.6%
|
Interestingly enough, Buffett's top four holdings (WFC, KO, IBM and AXP; in order) of his portfolio percentage-wise also happen to be among the companies whose shares he owns the most outstanding of. You may notice though, Buffett's ownership of shares outstanding of IBM are currently the lowest of his top four holdings by portfolio percentage.
IBM's Future In Buffett's Portfolio
The Board of Directors at IBM has authorized a five-year, $50 billion share repurchase program, which they made significant progress towards earlier this year when they authorized the purchase of approximately $11 billion worth of shares.
According to SEC records, IBM currently has around 1.1 billion shares outstanding, which with a share price at around $175 as of closing today gives IBM a market capitalization of approximately $192 billion. Buffett has gone on record on multiple occasions stating he hopes the price per share of IBM goes nowhere during the authorized $50 billion share repurchase program. No, he has not gone crazy, here is why:
Table 2. IBM Repurchase Scenarios
In Millions Except $/Share And %
|
One
|
Two
|
Three
|
Repurchase Plan (million)
|
$40,000
|
$40,000
|
$40,000
|
Price Per Share ($)
|
$175
|
$225
|
$275
|
Shares Repurchased (million)
|
229
|
178
|
146
|
Shares Outstanding (million)
|
1,100
|
1,100
|
1,100
|
Subsequent Outstanding (million)
|
871
|
922
|
955
|
Buffett's Share Ownership (million)
|
68
|
68
|
68
|
Buffett's Ownership Outstanding (%)
|
7.8%
|
7.4%
|
7.1%
|
Table 2 outlines what happens to the percentage of shares outstanding Buffett could own depending on what happens to the price per share of IBM during its repurchase program. For example, assuming IBM still has $40 billion to spend on repurchases, if the share price stays at $175 IBM would repurchase approximately 229 million shares, bringing Buffett's ownership of shares outstanding from 6.2% (Table 1) to 7.8% (Table 2). Should the price per share of IBM increase to $275, IBM could only repurchase 146 million shares and Buffett's ownership would only increase 0.9% to around 7.1%. Assuming IBM has net income of around $17 billion in 2013, the impact of Buffett's percentage ownership is huge because the 0.7% difference between 7.8% and 7.1% ownership is nearly $120 million. Stated differently, if the share price of IBM goes nowhere Buffett's ownership is $120 million more than if the share price was $275.
Assuming IBM pays the $3.70 per share this year it is on track to do so, it will have grown its dividend by over 20% compounded annually (CAGR) over the last ten years, from $0.70 in 2004 to $3.70 in 2013. Should IBM's dividend CAGR decrease a reasonable 1% each year for the next 20 years, Buffett is slated to rake in $6.2 billion in dividends alone from IBM over the next ten years, and more than $20 billion over the next two decades. Stated in dividends per share that is a growth from $3.70 in 2013, to $14.70 in 2023, to $23.40 in 2033. Figure 1 below details the projected annual growth, which is ~15% annually over the ten years ending 2023 and ~5% annually the ten years ending 2033.
Figure 1. Buffett's Projected Total Annual Dividends From IBM
(click to enlarge)
Conclusion
Millions and billions? Perhaps someday. But most individual investors deal with hundreds and thousands. Myself? I am considering making an initial investment in IBM totaling just over 5% of my investment portfolio. I intend to purchase shares for less than $175 each and hold on to them for at least two decades while IBM continues to expand in markets outside the United States. Over the next twenty years I expect to receive more than 172% my original investment, or ~$302 per share, in total dividends. And I do not care what the price of IBM is today or in five or fifteen years because I am buying IBM as an income investment.
I'm curious to learn if you think IBM is a fool's game for individual investors or a golden opportunity for those willing to invest.
By Douglas Denhartog
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