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According to IBM's (NYSE:IBM ) 2020 and 2021 Annual Reports, the corporation has $2 billion that it can spend on share buybacks (repurchases). These were "su-spend-ed" with the Red Hat acquisition. As a short- or long-term investor, when Arvind Krishna restarts or drops this authorized expenditure what will your reaction be: buy, sell or hold?

Short-term investors will most likely play the psychology of the market depending on if "da market" at the time perceives stock buybacks as a good or bad corporate investment—buy or sell on the news, so to speak. Long-term investors will need to be prepared with some in-depth perspective on past performance, and then decide if IBM's shareholder-return history might repeat itself—or at least rhyme.

This article is written for long-term investors. Although, I am only following the data where it leads, I will withhold my personal opinion. This information should only be one arrow in your long-term investment quiver.

At the end of the article, I will propose what I believe is a sales-productivity javelin you might consider adding to your investment-decision quiver.

It is hard to convince shareholders that sometimes share buybacks don’t work. The logic just seems so darn rational: reduce the supply of something and demand will drive the price of that something up. One investor on Seeking Alpha commented that “I want to be the last person holding that last share worth $100+ billion dollars!"​

This comment completely ignores the demand side of the supply-and-demand equation. The market today doesn’t consider IBM worth much over $130 a share despite its spending $201 billion on its shares since 1995—seventy percent more than its market value at the end of 2021.​

Still, some insist that if the corporation buys back enough shares the scarcity will increase shareholder value.

In the late 70s, Walt Rostow offered a timeless insight into the current stock buyback phenomenon.​

Standing in front of a University of Texas Economics 101 class with several hundred students, he took a single dollar bill out of his wallet, held it up and asked, “How much is this dollar worth?” After all the give-and-take, tongue-in-cheek comments, he proposed that, “If no one has confidence in the government that backs this dollar bill, its only value is as recycled paper and ink.”

IBM’s four-decade-long experiment with stock buybacks suggests that as it is with a government and its money, so it is with a business and its stock. IBM’s attempts to increase shareholder value through multiple, on-going stock buybacks has proven one undeniable fact: market "trust and confidence" means more to long-term shareholder value than repurchasing any amount of a corporation’s “paper and ink.”

The history of ​IBM's three stock buybacks (stock repurchases) supports a premise that buybacks will fail the corporation (and its shareholders) during bad times; and, during good times, it appears they add no additional, long-term positive value and cause the stock to underperform lower-risk investment alternatives.

Peter E. Greulich: Pixabay image that was modified with relevant words.

On three ever larger and longer occasions, the chief executives of IBM have tried to influence the price of their stock with share buybacks: (1) Cary for two years in 1978 and 1979, (2) Akers-Gerstner for thirteen years from 1986 to 1998, and (3) Gerstner-Palmisano-Rometty for two decades from 1999 to 2019. To determine if shareholder value is actually being generated, Morningstar’s SBBI Large Company Stocks Index is used as a consistent, historical benchmark that spans these periods.​

For IBM, the decade of the seventies was a decade of three Category 5 storms: economic, competitive, and political. Economically, a decade of both high inflation and high unemployment (the combination of which economists previously thought impossible—stagflation) brought demand to a standstill. Competitively, minicomputers and plug-compatible alternatives threatened the profitability forecasts of the System/370 (the successor of the System/360) and its peripherals. Politically, the success of the mainframe brought an onslaught of government and corporate antitrust suits that spanned the decade.

During such tough times, it is easy to understand why Frank Cary after spending billions to retool manufacturing plants would attempt stock buybacks—for the first time in IBM history—to reward his shareholders. He even tried a 4-for-1 stock split in the hope that lowering the stock price under $100 a share would attract smaller investors.

​Unfortunately, as the chart shows below, the returns from the share buybacks only mimicked the benchmark index. If there was any effect, it was minimal and short lived as the benchmark significantly outperformed the corporation’s flat stock performance through 1980.

Peter E. Greulich: Think Again! Chart of IBM Shareholder Returns from 1970 to 1981

Then, in June 1985, John Akers told analysts that the corporation would not meet the unrealistic growth expectations set by his predecessor: achieving a $100 Billion IBM by 1990 and a $180 Billion IBM by 1994. Even though the Internet did not exist to spread the news, the stock tanked within hours of his meeting and took the market down with it.​

But now, because the stock was obviously undervalued, the chief executive started share buybacks.

In IBM’s 1989 Annual Report, John Akers wrote how three years of stock repurchases had enhanced “shareholder value” (the first usage of the term in the corporation’s annual reports). He wrote that the on-going buybacks were “a continuing reflection of the company’s confidence in its prospects, and … its stock as an attractive investment.” Unfortunately, as the chart reflects below, the chief executive’s confidence was misplaced, and the data failed to support his outlook. The market considered the shares overvalued, and shareholder returns fell as the benchmark index, once again, moved significantly upward.​

Even the board of directors must have had second thoughts on these share buybacks, because after authorizing $5 billion in repurchases in late 1989, $4.3 billion went unspent. Evidently, they decided to not sink more money into their stock, and it was a wise decision as the company faced several disastrous earnings years in its Financial Crisis of 1992-93.

Peter E. Greulich: THINK Again! graph of IBM Shareholder Returns from 1979 through 1999.

But the replacement chief executive, Lou Gerstner, and his board of directors on January 31, 1995 restarted the share buybacks and decided to up the ante. Instead of averaging one billion dollars per year, the chief executive averaged over $6 billion. Did he think his predecessors didn’t reduce the supply of paper enough? Maybe, except that he quadrupled the number of shares in the market with two, 2-for-1 stock splits.

Again, this chief executive just like Frank Cary, sent confusing messages to the market. What was the actual strategy for increasing shareholder value: more or less supply? His results though are the only positive anomaly covering four decades of stock manipulation, because it appears that IBM shareholders benefited in the mid-to-late 90s from all this activity.​

Realistically, though, Lou Gerstner’s tenure maps directly to (1) the rise of technology stocks and (2) the longest U.S. economic expansion ever measured by the National Bureau of Economic Research, Inc. (NBER). Mr. Gerstner became chief executive three months after the NBER announced the beginning of this record-setting, economic expansion, and he declared his retirement – a bit earlier than analysts expected – two months after the research organization announced the expansion’s end and the start of the first recession in a decade. These are two facts that the chief executive failed to mention in his book, Who Says Elephants Can’t Dance?​

It seems that a historic, record-breaking, technology-driven, economic tide had lifted not only his shareholders’ skiffs but all investors’ boats.

And technology stocks still outperformed IBM with its share buybacks.

Starting in 1999, IBM once again raised the stakes by spending an average $9 billion dollars per year with a peak-year investment in 2007 of almost $19 billion—a twenty year total of $176 billion. These dollars were spent under the premise of increasing shareholder value. Unfortunately for IBM’s shareholders, any investor in a simple index fund that tracked large company stocks has achieved similar or higher returns with significantly less risk. When measured against the Dow Jones Industrial Average, IBM’s long-term shareholders would have ended each year better off in only five years over the last two decades.​

The following chart shows shareholder returns through 2021. IBM cannot avoid the long-term consequences of prioritizing over two decades of investment in paper instead of people, processes and products. So, this chart has been updated to reflect what Arvind Krishna inherited from his predecessors: an investment-hobbled corporation.

Peter E. Greulich: THINK Again! graph of IBM Shareholder Returns from 1998 through 2021.

In its 2020 Annual Report, IBM stated: "We suspended our share repurchase program at the time of the Red Hat closing to focus on debt repayment."

This brought to an end, one of the worst-performing, longest-term, share buyback schemes in American corporate history.

Harvey S. Firestone summarized the difference between an industrialist-driven and a capitalist-driven chief executive:

"The moment that officers or directors of a company begin to speculate in its stock, the ruin of the company is not far away, for it is impossible to serve both the company and the stock market."

Harvey S. Firestone, Men and Rubber: The Story of Business

IBM’s track record of share buybacks confirms some common-sense notions about stock repurchases:

Share buybacks have failed IBM’s shareholders three out of three times with one explainable anomaly. Five chief executive officers at one of America’s finest corporations failed in three attempts to maximize shareholder value because shareholder-first and -foremost does not work in the long-term.

For eight decades, IBM created societal wealth by investing in business-first: people, processes, and products. It drove down costs; it improved quality; it successfully expanded and extended into new markets; and it then distributed its ever-increasing profits equitably with all its stakeholders—who were its stabilizing foundation during tough times.

The 21st Century IBM has abandoned this successful formula, and its stakeholder foundation is crumbling. One symptom of a company suffering from this insidious form of corporate consumption—an economic wasting disease caused by an obsessive focus on stock buybacks, is falling sales productivity.​

As a result, the following chart is the biggest obstacle that Arvind Krishna faces: reversing a two-decade-long free fall in sales productivity. As chief executive officer, sales productivity is his sole and primary responsibility.

Peter E. Greulich: Chart created from IBM Annual Reports showing as a line graph IBM Sales Productivity from 1999 through 2021.

Arvind Krishna, as IBM's tenth chief executive officer, needs to get to work as his performance in his first two years has been disastrous.

Peter E. Greulich: THINK Again! Book Cover

To maximize long-term profits, a business cannot focus on shareholder-first and -foremost, or labor-first and -foremost, or society-first and -foremost. IBM’s history demonstrates that business-first investments are decisions that build and maintain a sustainable stakeholder ecosystem of customers, employees, shareholders and society; and it is the long-term, equitable distribution of these business-first profits—considering the economic, social and political environments of the time—that maintains a healthy stakeholder foundation for bad economic times.

A great chief executive officer who can achieve this balance and communicate the why behind his or her decisions is worth their weight in gold.

Unfortunately, in these two respects, IBM’s 21st Century chief executives have so far been lightweights. IBM needs a heavyweight leader to survive another century and keep its stock from becoming recycled paper and ink.​

It will be seen if Arvind Krishna will learn from his corporation's own history and refocus: first, on restoring the market’s trust and confidence in the company’s business strategy and then shifting the corporation’s priority from investing in paper to people, processes, and products.

This is the way shareholder value is maximized.

Finally, as a long-term investor consider the words of J. L. Mott, President of the Iron and Steel Association in 1873.

If my foresight were as clear as my hindsight, I should be better off by a damned sight.

This has been a four-decade-long, hindsight-look at IBM's buybacks.

May it sharpen your long-term "foresight."

This article was written by

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.