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IBM Buyback Proves Warren Buffett's Math

Tickers in this article: AXP BRK.B GS IBM KO WFC

NEW YORK (TheStreet) -- International Business Machines shares are virtually unchanged from when Warren Buffett outlined in Berkshire Hathaway's 2011 shareholder letter why he wouldn't mind a flat share price over five years.

IBM's announcement Tuesday that it will increase its quarterly dividend by 12% to 95 cents and authorize an additional $5 billion in share buybacks proves Buffett's opinion, even if the "Oracle of Omaha's" comments in the Feb. 25, 2012 shareholder letter raised some investor eyebrows.

Buffett's point to investors was share buybacks at a reasonable price can add significant value for long-term shareholders like Berkshire Hathaway, over time.

If IBM's shares were stagnant at around $200 a share, the company's authorization to repurchase up to $50 billion in shares would boost Berkshire's economic interest in "Big Blue" and give it an even more attractive claim on future earnings streams, Buffett said.

"I won't keep you in suspense. We should wish for IBM's stock price to languish throughout the five years" of the buyback, Buffett wrote in the 2011 shareholder letter.

As it turns out, Buffett was spot on in his expectations and analysis.

IBM shares closed Monday trading at just below $200 a share, roughly in-line with the $197.76 share price the company carried when Buffett published his 2011 annual letter on Feb. 25.

With an authorization to buy back about 25 million more shares as of Monday closing prices, IBM is now authorized to repurchase about $11.2 billion in shares, or approximately 5.6% of its overall share count.


"Since 2000, we have returned over $150 billion to shareholders in the form of dividends and share repurchases," Ginni Rometty, IBM chairman, president and chief executive officer, said in a Tuesday statement. "This enables the company to deliver value to our shareholders."

Given Buffett's comments on IBM, it's no surprise other large Berkshire investments such as Coca-Cola , Wells Fargo and American Express have all announced big increases to share buybacks, in recent months.

"Stock repurchases at Coca-Cola and American Express raised our percentage ownership. Our equity in Coca-Cola grew from 8.8% to 8.9% and our interest at American Express from 13.0% to 13.7%," Buffett wrote in his 2012 letter to shareholders.

Goldman Sachs , a new investment poised for Berkshire's portfolio, is among the biggest net buyer of shares in the entire banking sector.