Warren Buffett shocked many long time observers by announcing in 2011 that he had purchased a large slug of stock in IBM. By the end of 2011, his holding company Berkshire Hathaway had purchased almost 64 million shares of the company – equivalent to 5.5% of IBM – for $10.9 billion, paying about $170 per share for the initial stake. Over the next several years, Buffett routinely added to Berkshire’s IBM stake. The stake was 68 million shares at the end of 2012, 77 million shares at the end of 2014, 81 million shares at the end of 2015 and 2016, equal to an 8.5% stake worth $13.5 billion.
Among the reasons Buffett cited for the purchase was IBM’s track record in repurchasing its stock. He wrote in Berkshire Hathaway’s 2011 Annual Report:
“Let’s use IBM as an example. As all business observers know, CEOs Lou Gerstner and Sam Palmisano did a superb job in moving IBM from near-bankruptcy twenty years ago to its prominence today. Their operational accomplishments were truly extraordinary. But their financial management was equally brilliant, particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders. The company has used debt wisely, made value-adding acquisitions almost exclusively for cash and aggressively repurchased its own stock. Today, IBM has 1.16 billion shares outstanding, of which we own about 63.9 million or 5.5%. Naturally, what happens to the company’s earnings over the next five years is of enormous importance to us. Beyond that, the company will likely spend $50 billion or so in those years to repurchase shares. Our quiz for the day: What should a long-term shareholder, such as Berkshire, cheer for during that period? I won’t keep you in suspense. We should wish for IBM’s stock price to languish throughout the five years. 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%.”
Buffett got what we asked for, although perhaps there does exist ‘too much of a good thing.’ Six years after purchasing the stake, Berkshire unloaded a third of it, almost certainly receiving less than was paid, although dividends were collected over the holding period. The stock currently trades for about $155 per share.
While Buffett has said he was simply wrong about the future of IBM, it’s also possible that tax concerns played a role in the selling. Should the corporate tax rate be reduced by Congress this year, the value of the deductions Berkshire would receive from capital losses would also decline.
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