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Investment thesis: IBM (IBM) is all about income now. Add small amounts to your portfolio for the yield. But don’t expect large share increases.

When I was growing up in the 1970s and 80s, IBM was a stalwart of the investing community. Brokers couldn’t go wrong recommending it. It was the tech juggernaut that made money every year.

While it’s still an impressive company, it has changed its focus to tech consulting (emphasis added):

International Business Machines Corporation provides integrated solutions and services worldwide. Its Cloud & Cognitive Software segment offers software for vertical and domain-specific solutions in various application areas; and customer information control system and storage, and analytics and integration software solutions to support client mission on-premise workloads in banking, airline, and retail industries. It offers middleware and data platform software, including Red Hat that enables the operation of clients’ hybrid multi-cloud environments; and Cloud Paks, WebSphere distributed, and analytics platform software, such as DB2 distributed, information integration, and enterprise content management, as well as IoT, Blockchain and AI/Watson platforms. The company’s Global Business Services segment offers business consulting services; system integration, application management, maintenance, and support services for packaged software; and finance, procurement, talent and engagement, and industry-specific business process outsourcing services. Its Global Technology Services segment provides IT infrastructure and platform services; and project, managed, outsourcing, and cloud-delivered services for enterprise IT infrastructure environments; and IT infrastructure support services. The company’s Systems segment offers servers for businesses, cloud service providers, and scientific computing organizations; data storage products and solutions; and z/OS, an enterprise operating system, as well as Linux.

Ultimately, the switch was the right move since computer hardware has become a simple commodity. But there’s a tremendous amount of core overlap between IBM and its competitors. The difference between the companies has turned into one of personality (company X has employee Y who is a leading thinker and innovator in the field) and services rather than hardware innovation.

And, the earnings juggernaut that once was is no more.

IBM Annual Gross Revenue

IBM Annual Gross Revenue

Seeking Alpha

Top-line revenue has been decreasing since 2012, save for the modest increase in earnings in the last 12 months.

Core Revenue Statement Percentages

Core Revenue Statement Percentages

Seeking Alpha

The gross profit margin is down marginally in the last ten years. But the operating net margins are down materially. This is likely due to increased costs from the change in its business model. But analysts will always prefer wider rather than tighter margins.

What makes this stock attractive is its dividend yield, which, thanks to an incredibly strong cash flow, is safe:

IBM Cash After Dividends and Interest

IBM Cash After Dividends and Interest

Seeking Alpha

The above table uses information from the company’s cash flow and income statement. The third row subtracts total investment spending from total cash from operations. This number was strongly positive in all years. The row second from the bottom totals all common dividends and interest payments, which are when subtracted from the figure in the third row. The bottom row shows that the company has ample remaining cash after making dividend and interest payments.

In other words, the dividend is fine.

And then we have the charts:

Weekly and Daily Chart of IBM

Weekly and Daily Chart of IBM

Stockcharts

Neither the weekly (left) nor daily chart (right) is exciting. Yes, the weekly chart is higher after two years. But there are only two short periods of price increases. Most of the time the stock is trading sideways. And during the last year (right) most of the movement is lower.

IBM is really more a high-grade bond than stock investment. This is really about dividend yield (which is attractive) instead of capital appreciation. If you need an income position, consider IBM. But this isn’t a large position stock and you shouldn’t be thinking this is going to climb in share value. Instead, “clip the coupon” and be done with it.



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