What Does Warren Buffett See in IBM? Maybe This

We don’t talk fundamentals much, if at all.  However, the chart below says a lot about why Warren Buffett might bother with buying IBM, a technology company, when the stock is trading near an all time high.


Buffett's latest annual report goes to great length in citing IBM's stock repurchase plan among other reasons why he bought the company's shares.  Buffett says the following:

"Let’s do the math. If IBM’s stock price averages, say, $200 during the period, the company will acquire 250 million shares for its $50 billion. There would consequently be 910 million shares outstanding, and we would own about 7% of the company. If the stock conversely sells for an average of $300 during the five-year period, IBM will acquire only 167 million shares. That would leave about 990 million shares outstanding after five years, of which we would own 6.5%.

"If IBM were to earn, say, $20 billion in the fifth year, our share of those earnings would be a full $100 million greater under the 'disappointing' scenario of a lower stock price than they would have been at the higher price. At some later point our shares would be worth perhaps $1.5 billion more than if the 'high-price' repurchase scenario had taken place." (Source: 2011 Berkshire Hathaway Annual Report. page 6)

In order for IBM to make ever increasing dividend payments and massive stock repurchases, IBM has to be generating serious cash flow.  The combination of the two are creating an undervalued situation that may not exist for quite some time in the future.

As we’ve said before, Edson Gould’s Altimeter is a summary of relative values for a stock's price which only requires additional fundamental information for support.  We saw a similar undervalued Altimeter in Transatlantic Holdings (TRH) and Wesco Financial (WSC) which prompted our articles titled "Transatlantic Holdings: A Value Proposition Worth Consideration" and "Wesco Financial: Fundamentals and Technicals Are Aligned" before Buffett made a bid for both companies.

In this case, the dividend has been rising much faster than the stock price, among the many reasons that Buffett might be interested in a technology stock near an all-time high.

Now, just imagine what the stock will look like after falling to a 52-week low.

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