International Business Machines Corp (NYSE:IBM) has had a poor 12 months by its standards. Nevertheless the negative attention that the company has received recently has been totally unfounded. We are holding this stock in our portfolio and will continue to hold it for the long term. The company has raised its dividend for 19 years straight (we collected our latest dividend payment on the 10th of March) and we believe it will continue to reward its shareholders through increased dividend payments going forward. IBM Maximo Course Let's go through some of the myths surrounding this stock and explain in detail why many analysts are wrong in their assumptions about IBM.First of all lets look at the stock chart and compare it with SPDR S&P 500 ETF Trust (NYSEARCA:SPY) since the bottom of the last equity bear market (March 2009)
The performance here is not terribly bad. Yes it has underperformed the S&P500 but not by very much. It is only since mid to late 2014 that the stock has seriously underperformed. This is too short a timeframe to make a long term decision about this stock. So why has the company underperformed so much in the last 9 months? Rating agencies and analysts are stating that the company has fundamental problems which can not be resolved. Let's go through the negativity surrounding this stock and question the validity of some of the claims.Firstly bears are stating that revenue is not growing and the stock price won't increase substantially in price without increasing sales every year.Sales are definitely not increasing as the chart shows below.
Sales are near 2007 levels which is a disappointment to say the least. Yet many analysts forget that IBM has sold many parts of its business in the last few years. It is very difficult to grow revenues if parts of its business are being sold off. Synnex, Lenovo and Global Foundaries are just a few of the companies that IBM has sold to recently. I find it amusing when I read articles about IBM being a dinosaur. This statement couldn't be further from the truth. This company is actually getting smaller to become more profitable in the future. It is selling its low profit divisions in order to concentrate on higher value markets. The chart below is the chart I am interested in (net profit margins) and although recent action has been poor, I believe the company will return to healthy profitability as it has done from 2006 to 2011.
IBM is presently going through huge transformation. The company has doubled its profit margin in the last 10 years (which many analysts never mention) but I expect this to even get better. Why? Because of the bold decisive decisions the company is making. IBM is competing in sectors that are changing rapidly. Cloud and mobile initiatives contributed $25 million to revenues in 2014. An extra $4 billion is going to pumped into this area by the company in 2015. The company expects that this area of its business (strategic imperatives) of cloud, analytics & mobile will grow to $40 billion in revenues by 2018 or 40% of turnover.
There are 2 ways you can look at this company, long term and short term. We as long term fundamental investors understand the direction this company is taking. It is selling off (which will reduce revenues in the short term) low value divisions in order to invest in higher value sectors. Also the strong dollar may effect the company's earnings in the short term as international sales make up a large part of the company's turnover. I as an investor don't mind falling sales in the short term as long as profit margins are increasing. The company will continue to adapt through investment and acquisitions which is a requisite in the tech sector as the companies that adapt the quickest will dominate this sector in the years to come.
The second gripe many bears have is the company's buyback programs. Analysts who are bearish on this company claim that these buyback programs (which can change earnings) are being done to hide the real problems at the company. I don't buy any of this. A company doesn't become a 100 year old giant in this industry by "financially engineering" the numbers. This company always has bought back shares through share buyback schemes. Also why would Warren Buffet continue to invest in this company? Would he continue to be a shareholder if he thought IBM was doctoring the numbers? Why is he increasing his holdings in the company at the moment? As income investors we love share buybacks. Buybacks reduce the amount the shares outstanding which results in our shareholdings becoming more valuable. When you couple buybacks with increasing dividends, you have a company that genuinely looks after its shareholders. So when you read another article about IBM attempting to "hide the truth", question the validity of the claim. Many analysts are looking for readers for their work and negative bombastic titles unfortunately attract a lot of attention.
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