AT&T Inc. (NYSE:T)’s wireless and wire-line businesses recently grew at 5.7% and 2.4%, respectively. This gave Ma Bell more free cash flow to reward shareholders with. AT&T’s net margin of 9.5% allows AT&T to pay out 60% of its free cash flow in the form of a 5.1% dividend. This is a conservative income investor’s dream stock. Going forward, share repurchases will continue to be big drivers for increases in earnings at both AT&T and IBM. This effect will, however, start to slow down once interest rates start rising and cheap money becomes harder to find.
Re-balancing
International Business Machines Corp. (NYSE:IBM) spent $1 billion this quarter buying out employees to reduce expenses going forward. The company plans on driving more of these efficiencies going forward to contain expenses year-to-year.
Last year, HP laid off nearly 20,000 employees in an effort to reduce reoccurring expenses in lower-performing divisions. These expense reductions will help the company going forward, but you can’t cut your way to revenue growth.
Divestitures were another hot topic on IBM’s call this quarter. Low-end servers were rumored to be sold to Lenovo, the Chinese company that purchased the IBM ThinkPad notebook division in 2005. This would make Lenovo a stronger competitor to HP and give Whitman’s company an even greater hurdle to become profitable by switching to servers and software.
IBM does have the advantage of having a non-unionized staff. AT&T, on the other hand, has grappled with keeping the current pension obligations funded in this low interest rate environment. Going forward, companies from the old guard that have long-term inflexible contracts will find it harder to compete against their more nimble new start-up competitors.
The bottom line
IBM was able to repurchase over 4% of its shares outstanding this year. The company’s move to higher-margin products reduces the amount of revenue IBM has to bring in to maintain profit growth. The company is still in the process of shifting to software and services, but as we saw last week, International Business Machines Corp. (NYSE:IBM) is still susceptible to stumble over its hardware divisions.
AT&T is a stalwart of the economy and has set itself up to be a continued strong competitor in the telecom space, while paying dividend investors a juicy 5.1% yield. HP, on the other hand, still has to prove that it is not going to be dependent on its hardware division forever. HP’s execution on a move into software and services could be short lived if Lenovo jumps in and starts to under cut server prices, like it did with laptops. The ground is still shaky with HP, and I would avoid it.
The article How Is Big Blue Stacking Up? originally appeared on Fool.com and is written by Wes Patoka.
Wes Patoka owns shares of International Business Machines and AT&T. The Motley Fool owns shares of International Business Machines. Wes is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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