When Warren Buffett bought up 5% of International Business Machines Corp. (NYSE:IBM)‘s stock for Berkshire Hathaway during 2011, he made a strange statement. The Oracle of Omaha said he would like IBM’s shares to “languish” for a few years. Fortunately, Buffett has now got his wish, as IBM’s stock has recently taken a tumble, down 15% from its yearly highs and nearing a multiyear low.
The fall in International Business Machines Corp. (NYSE:IBM)’s share price is somewhat unwarranted. The declines started back at the end of Q1, when the company reported that revenue had fallen 5% for the quarter . The sell-off then continued throughout the second quarter when the company announced that Q2 revenue had declined a further 3% and net income had fallen 17%. However, this decline in net income mostly came down to a one-off restructuring charge: Excluding these charges, net income gained 3%. The company also raised its full-year 2013 outlook within the Q2 earnings release.
In fact, this recent decline is positive for all of International Business Machines Corp. (NYSE:IBM)’s long-term investors, as the company will now be able to do what it does best: buy back stock at even better prices, as Buffett explains in this excerpt from his 2011 letter to shareholders:
Let’s do the math. If International Business Machines Corp. (NYSE: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%.
So, if we assume that International Business Machines Corp. (NYSE:IBM) buys back $3 billion worth of stock during the third quarter, at an average price of $190 per share, the company will remove 15,789,473 shares from the market. Whereas if the company spent $3 billion buying back stock at the second quarter’s average price of $205, the company would only buy back 14,634,146 shares — 7.9% fewer shares than were acquired at the lower price.
Falling revenue and rising EPS
What’s more, Philip Morris International Inc. (NYSE:PM) has recently bounced off 52-week lows, and for a company that is so dependent upon buybacks to boost earnings, long-term holders should see a significant boost to their equity holdings over this quarter.
Philip Morris International Inc. (NYSE:PM)’s declines are not localized. In fact, peers Altria, Reynolds American, and Lorillard have also experienced serious pullbacks. These declines have been widspread among dividend-paying stocks recently as investors trade out ahead of the Federal Reserve’s “tapering” of its long-term asset purchases, which is widely expected to begin this month.