$4 billion stock sale suggests Warren Buffett's love affair with IBM is over

Berkshire Hathaway's founder Warren Buffett has admitted that buying IBM shares was a mistake. He has sold 30 percent of his 81 million shares because the company failed to live up to the expectations it held in 2011.

Becky Quick interviews Warren Buffett on CNBC

Becky Quick interviews Warren Buffett on CNBC. Image: ZDNet screen grab.

We have grown up in an IT world where "nobody ever got fired for buying IBM" - or so it was said. It was mostly true when IBM had 70 percent of the market, and had the power to set industry standards. However, as I pointed out in a recent post, IBM's turnover has now declined, on a year-for-year basis, for 20 quarters in a row. That's five years of failure. As a result, IBM's revenues are now smaller than Apple, HP (combined), Google and Microsoft, and it has fallen from first to 31st place in the Fortune 500.

Last week, IBM's share price took a hit when Berkshire Hathaway's Warren Buffett admitted he had made a mistake by buying IBM instead of Apple or whatever. IBM's share price has fallen by roughly 11 percent since 2011, so he'd have done better with an S&P tracking fund. If he'd bought Google (Alphabet) shares - up by around 230 percent - Buffett would have made around $30 billion.

In an interview with CNBC's Becky Quick, Buffett explained that IBM "hasn't done what, five or six years ago, I expected would happen - or what the management expected would happen, if you look back at what they were projecting, and how they thought the business would develop.

"The earnings have been obviously disappointing. I mean, five or six years ago, I think they were earning $20+ billion pre-tax and maybe it's $13 billion now, and I don't think the quality of the earnings has improved.

"It's been a period when it's been tougher than they thought and it's been tougher than I thought. But I was wrong. I don't blame them. I get paid to make my own decisions, and sometimes they're right and sometimes they're wrong."

Buffett is still a large IBM shareholder. He told Quick that Berkshire Hathaway had bought about 81 million IBM shares and had sold "in the area of 24-25 million". He started selling when the shares went above $180, and 24m shares at that price would be worth $4.3bn. (The current price is $152, which would be $3.6bn.)

Buffett said he'd paid more than $180 for some IBM shares, so Berkshire Hathaway would benefit from making a tax loss while it's paying a 35 percent corporate tax rate. The rate could well be lower next year.

Buffett also added that we "made the dividend, basically" - but even the dividends have been below expectations. IBM's previous CEO, Sam Palmisano, pledged to deliver $20 in earnings per share by the end of 2015. Current CEO Ginni Rometty abandoned that effort in October 2014 on the reasonable grounds that IBM was never going to make it, even after borrowing billions of dollars to buy its own shares.

At the moment, IBM's EPS of $12.17 reflects the fall in annual pre-tax profits from more than $20bn - which Buffett remembered correctly - to just $12.3bn in fiscal 2016.

Buffett still has a problem, because Berkshire Hathaway may still own more than 50 million IBM shares, worth more than $8bn. Dumping them would drive the stock down. He must be hoping that the price will recover, though it's unlikely to reach its 2013 peak of $213.30 in the near future. For a look at IBM's problems and prospects, see the second part of this article: What went wrong at IBM? Its 'master plan' has failed to deliver...

Financial disclosure: I do not own any shares in any companies mentioned, nor do I plan to buy any. I do not give financial advice, and if I did, you'd be a fool to take it. As I have said before, no sensible person would trust me with their lunch money.

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