By JACK HOUGH
Berkshire Hathaway bought $10.7 billion worth of IBM (IBM)
The move fits with Mr. Buffett's stated goal of targeting large acquisitions. "Our elephant gun has been reloaded, and my trigger finger is itchy," he wrote earlier this year in a letter to shareholders.
But it's also an unusual choice, for two reasons. First, Mr. Buffett has long avoided technology shares. "There's a lot of money to be made from [technological] change, I just don't think I'm the one to make a lot of money out of it," he told University of Washington students in 1998.
Second, he has a well-known preference for value stocks. IBM has doubled in price in five years and sells for 14 times this year's earnings forecast, on par with the broad stock market.
Mr. Buffett explained Monday that he long avoided railroad stocks, too, and that when he bought them he did so at new highs.
In IBM, he said he likes the "reverence" the company shows for its stock by not issuing large amounts of dilutive options to employees as pay, as many technology companies do. He touted the company's history of "laying out a road map" and then following it, and said he gained new clarity on its direction after reading its 2010 annual report.
In that report, IBM chairman Sam Palmisano explained how IBM has transformed itself from a seller of commodity hardware into a provider of customer software and services. Growth opportunities, he wrote, would come from rapidly expanding markets like China, India and Brazil; from advanced analytics, as companies seek to turn vast stores of data into useful information; from cloud computing, or the shift from locally installed software to web-based programs; and from key industries, including healthcare, banking and telecommunications, where Mr. Palsimano believes IBM's ability is strongest.
Over the past decade, the report noted, IBM has spent $107 billion on its stockholders in the form of dividends and share repurchases. That's more than half IBM's current stock market value. It spent a further $60 billion on research and development of new products.
"We see solid underlying deal-flow and pipelines for IBM, particularly in emerging geographies and high-margin software," wrote Rob Cihra, an analyst with investment bank Evercore Partners, in a Nov. 3 note initiating coverage of IBM with an "outperform" rating. IBM's ability to spend richly on research, and to build technology infrastructure that clients can't match with off-the-shelf products, are key competitive advantages, wrote Mr. Cihra.
Investors eyeing IBM shares should consider the so-called Buffett premium, although it appears modest: IBM shares were 1% higher in early trading Monday.
The stock comes with a modest dividend yield of 1.6%. Among S&P 500 companies that pay dividends, the median is 2.2%. That comparison might understate IBM's ability to lavish cash on stockholders, however. It raised its payment 15% in April and still spends just 22% of its profit on dividends. Last year, the company spent nearly $5 on share repurchases for each dollar it spent on dividends.
Investors who which to follow Mr. Buffett's technology move while paying a lower price might consider shares of Microsoft, which sell for less than 10 times earnings and carry a 3% dividend yield. On Monday, Mr. Buffett explained that while he finds the stock attractive, he has vowed to avoid buying it, lest he raise suspicions that he received a tip from friend and Microsoft founder Bill Gates.