IBM’s Management Has Also Given Its Opinion
IBM’s management must think the company has a long future ahead. The company has elected to use a significant portion of its cash flows to repurchase its shares.
If management thought the company’s future was very much uncertain, they wouldn’t repurchase shares (at least I hope they wouldn’t as they would just be throwing money away). The image below shows how the company has consistently repurchases shares:
It is important to take management’s proclivity for share repurchases with a grain of salt. Share repurchases help boost earnings-per-share, which is a metric that is often tied directly to executive compensation.
Share repurchases are normally good for shareholders. If you believe IBM’s future is very uncertain, share repurchases are a poor idea. On the other hand, if you believe IBM is very undervalued at current prices, share repurchases are one of the best uses of cash available to IBM.
IMB’s Competitive Advantage
There uses to be a truism that went like this:
“No one ever got fired for buying IBM”
That phrase shows how powerful IBM’s brand and reputation used to be. At one point, IBM controlled 65% of the IT industry.
IBM has lost a tremendous amount of market share. The company’s brand has also tarnished. Take the comment below from Seeking Alpha user ForgetBeta
“‘No One Ever Got Fired for Buying IBM’. It used to hold true, but no more. I work in IT for banks, i.e. traditionally entrenched moat style clients for IBM. In my experience the old adage which used to always hold true, now holds true in less than 5% of the cases (as opposed to 95% two decades ago).”
That’s not a good sign. All indications are that IBM’s brand based competitive advantage is declining.
Another intangible asset pro-IBM investors tout is the company’s impressive catalog of large customers. IBM does work with federal, state, and local governments as well as some of the largest corporations in the world. Its long corporate history has given it excellent connections.
I believe that IBM’s legacy will help the company to continue extracting profits from its more entrenched customers. Over the long run, this advantage will not in itself protect IBM.
IBM exists in a continuously changing industry.
“One constant throughout IBM’s over 100-year history has been the need to continually transform the company in an ever-changing industry. Our industry, our clients—and IBM itself—is in the midst of such a fundamental transformation.”
The quote above from the company’s 2014 annual report (page 28) speaks to how rapidly and continuously the technology industry changes. The rate of change is only accelerating. IBM is not the dominant player in the technology industry like it was in the 1960’s through 1980’s. The company is being outcompeted by nimbler organizations and services – like Amazon’s (AMZN) AWS.
After analyzing IBM’s business with a very long term view, one can see the company has been in a slow decline for at least a decade. The business may have grown some in that time period, but IBM’s brand and reputation based competitive advantage has slowly been eroding.
Recent News & Final Thoughts
IBM recently agreed to purchase The Weather Channel’s data collecting devices (and presumably its historical data) for around $2 billion. This acquisition is not transformative. It will not change IBM’s long-term trajectory.
The company is also being questioned by the SEC over possible improper revenue recognition (meaning accounting fraud). This only adds to the uncertainty surrounding IBM.
Could IBM turn around? Absolutely. Is it likely? I am not so sure. IBM has too many moving parts. The company appears to be in a long-term downward trend. It is being outcompeted and there are questions as to its direction.
Dividend investors looking for ~4% yields can choose far safer stocks for this level of yield. A partial list is below:
- Eaton (ETN) with its 3.9% dividend yield
- Verizon (VZ) with its 4.8% dividend yield
- Cummins (CMI) with its 3.8% dividend yield
- Caterpillar (CAT) with its 4.2% dividend yield
None of these companies are in the technology industry with the exception of Verizon – although telecommunications is really only related to the technology industry.
You don’t get bonus points for investing in hard-to-understand companies, or for the technology industry for that matter. IBM offers a solid yield and a low price-to-earnings ratio, but its significant qualitative risks make it a poor choice for investors looking for stability and dividends.
Warren Buffett has given International Business Machines Corp. (NYSE:IBM) his seal of approval. I certainly wouldn’t bet against the Oracle of Omaha and short IBM. I do think that IBM is a fairly risky investment. There are other high yielding companies with more certainty than IBM offers (like the 4 listed above).
Disclosure: None
