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IBM Sees Bump Up on Buybacks

The company's CFO says IBM will almost double its annual EPS share by 2010.

If all goes according to plan,


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will nearly double its annual earnings per share by 2010, according to the company's CFO.

Big Blue's plan to reach this goal is fairly generic: cut costs, buy back shares, make acquisitions and double sales in emerging markets.

CFO Mark Loughridge said at a meeting with analysts Thursday that the combination of its plans will add $5 to its earnings per share by 2010, up from $6.06 last year.

His comments helped push up IBM's share price by $2.29, or 2.1%, to $107.60 in midday trading Friday.

IBM expects overall revenue gains to account for 75% of its ability to boost earnings. In particular, it is relying on sales of high-margin software. IBM said software sales will account for about half of revenue by 2010, up from 40% last year.

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Central to the company's software sales is a technology called "virtualization" that harnesses unused power on servers that store files and process tasks for computers on large enterprise networks.

The lure of virtualization is that it can help companies eliminate idle servers, reducing their expenditures on equipment and cutting the costs of energy and personnel to run them.

IBM estimates that sales of virtualization technology will add $1 billion in gross profit by 2010.

Increasing sales of high-margin software is part of the vision of CEO Sam Palmisano, who took over in 2003. He has moved the company away from relying on sales of hardware such as PCs and memory devices that have become lower-margin tech commodities.

To juice its growth in EPS, IBM said in April that it will borrow money to step up its stock buyback program by an additional $16.4 billion.

By 2010, it plans to have spent $40 billion on stock repurchases. Since 1995, Big Blue has spent almost $80 billion to repurchase more than 1.2 billion shares.

Goldman Sachs estimates that more than 90% of the buybacks will help IBM's EPS by reducing the number of shares outstanding, rather than mopping up stocks from options given to employees.

Part of IBM's cost cutting will come from reducing payouts from its pension plan. If IBM has done its math correctly, the pension savings it anticipates could accelerate earnings growth to 16% from a range of 10% of 14%, according to a note from Bear Stearns analyst Andrew Neff.