I know the market got excited yesterday when IBM announced a $15 billion increase to its buyback plan. I wasn’t overly impressed, as you may know that I am not a huge fan of buybacks (click here and scroll down). Bulls love to hype them when they are announced but the realities of share repurchases are not so exciting.

Listening to the cheerleaders cover the story yesterday, you might be led to believe that IBM increased its guidance and announced the buyback because they were going to be generating so much extra cash they wouldn’t know what to do with it. The reality is that the 5 cent increase in EPS guidance came directly as a result of the reduction in shares expected from the buyback. The cause and effect is exactly the reverse of what many investors were told yesterday.

Don’t take my word for it - here is what the company said in its press release:

IBM said it expects to spend up to $12 billion on stock repurchases in 2008. In January, the company said it expected 2008 full-year earnings per share of $8.20 to $8.30. IBM said the anticipated share repurchase activity could add up to $.05 to 2008 full-year earnings per share. The company now expects full-year 2008 earnings per share of at least $8.25, or year-to-year growth of 16 percent. The actual earnings per share impact will depend on the total amount spent, the timing of repurchases and market conditions.

In 2007, IBM had operating cash flow of $16.094 billion. During the year, they purchased $18.8 billion of their shares. I find it hard to get too excited about IBM’s ability to generate so much extra cash when more than 100% is spent on company shares. Where did the money for buybacks come from? Mostly it came from $21.744 billion of new debt.

According to IBM’s press release announcing this year’s repurchase plan, they intend to spend about $12 billion on their stock. Hopefully they’ll have more than that in operating cash flows this time. Don’t get me wrong - I thought the 2007 revenue growth and operating performance was good. However, as it relates to their 2007 repurchases and the new announcement for 2008 I was not impressed.

The rest of the market seemed to be and that is more important than what I think. (Note that I have had an UP signal on IBM since February 11, 2008.) The fact is that the average price per share of IBM stock repurchased during 2007 was $105.29. When yesterday’s buyback hype started, the stock was trading at $110, a whopping 4.4% higher than what they spent on 2007 repurchases. Sorry, but that doesn’t impress me as a great investment. Not a bad one, but not great either. What made it great to others seems to be the very act of announcing buybacks which caused a 6% increase in one day. I guess what this company needs to do to make investors happy is to just keep announcing $15 billion buybacks. That did much more for the stock than increasing revenues by 8%.