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(IBM) - Get International Business Machines Corporation Report

wowed investors Tuesday with a 33% dividend boost and word that it would buy back up to $15 billion of its stock.

Including a previous $1.4 billion authorization, management is now authorized to repurchase 11% of the company. As a result, IBM shares gained 3.4% on the session, reaching their highest level in two months.

Management said it will complete a "substantial portion" of the repurchase before the end of the year, and the reduced share count could add 10 to 20 cents a share to annual earnings.

That would allow the company to deliver 12% to 14% earnings improvement from the $6.06 it posted in 2006, up from management's long-term annual guidance of 10% to 12% annual profit growth.

The viability of IBM's long-term growth target was called into question as recently as last week, when management posted first-quarter results. The stock fell 3 points and received as many analyst downgrades after just meeting the first-quarter consensus analyst earnings estimate of $1.21 a share, representing 8% growth from the previous year.

The disappointment came as service revenue was soft, especially in the U.S. After the sale of its PC business to China's


in May 2005, about 56% of IBM's total revenue comes from global IT services.

There's also the fact that IBM already had bought back $8.1 billion of its stock in 2006, on top of $7.7 billion in 2005 and $7.1 billion in 2004. That said, over the past three years, IBM shares have returned just 7.9% (2.56% compound annual rate), or 11.4% (3.65% compounded) if you factor in dividends. Over the same period, the

S&P 500

has gained 29.5% (9% compounded) and 36.9% (11% compounded) with dividends.

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With that in mind, I'm here to answer readers' questions: Should I do it? Has Big Blue given investors something to cheer about, or is this just a smoke screen to mask the company's declining growth?

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IBM's new dividend is 40 cents a share, which represents another $2.4 billion that will be returned to investors each year. Shareholders at the close of trading May 7 will qualify for the June 9 payout. The company's 1.62% yield is at the high end of the industry range but is 15 basis points less than what the average S&P 500 company offers.

IBM can cover the dividend 4.2 times with expected full-year earnings, but it will have to take on debt to cover the buyback. The company has already borrowed $23.9 billion, according to its most recent balance sheet, compared with $10.8 billion of cash. Even so, the company's bonds are rated A+ by S&P, and IBM's operating cash flow was 53% greater than reported net income over the past four quarters.

At Tuesday's closing price of $98.49, the stock is trading at 14.6 times expected 2007 earnings of $6.74 a share. This values IBM at an 8.3% discount to the

S&P 500

and 18% below the company's average historical valuation, according to Bloomberg.

Yes, I do believe that IBM is attractive at current levels. I believe the stock will close its valuation discount and could trade up toward $110 by the end of the year, indicating an 11.7% gain before dividends.

That is above my expectations for the broader market averages for the remainder of the year, and if the company can manage to turn its core business around, it's possible that IBM shares could see $120 or $125 over the next 12 months.

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David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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