IBM Fundamental Analysis by the Numbers


All investing is not done with the same objectives or goals in mind. This applies to investing in common stocks just as it does to investing in real estate, commodities, fixed income vehicles, fine art or collectibles – and any other investment that comes to mind. There are times when investors are looking for maximum total return, which is often automatically associated with buying a stock. However, there are also investors looking for high current income, or a growing income stream. Other investors might be more concerned with safety than they are return. Or as Will Rogers so aptly put it: “I am not so much concerned with the return on my capital as I am with the return of my capital.”

I bring this up because my experience suggests that people tend to be myopic when it comes to investing in stocks. For example, there are those that believe that you should only invest in a stock that can beat the so-called market. Similarly, there are those that believe you should only invest in a stock with the objective of generating a high total rate of return. Therefore, if a stock is not meeting those specific objectives, then it is often considered a bad stock.

For example, in 2015 I wrote an article titled “Retirees: I Did Not Buy IBM To Sell; It’s About the Dividend Income, Stupid.” Although I was having a little fun with the title, I was also attempting to point out that I was investing in IBM solely for its growing dividend income stream and safety. When that article was published, IBM was offering a current dividend yield of 3.7%. More to the point, the dividend has increased each year since at an average growth rate of approximately 9 to 10%. Moreover, IBM has also generated substantially more dividend income than I would have gotten had I invested in the S&P 500. Consequently, IBM has met and even exceeded my expectations and objectives thus far. Therefore, I have been very pleased with my IBM holding.

On the other hand, IBM was trading at a price of approximately $141 when I wrote the cited article versus the $130 it currently trades at as I write this article. However, many might be surprised to learn that I could care less about what IBM is currently trading at. The reason is simple, as I also stated in the title, I did not buy IBM to sell, instead, I bought IBM for the opportunity to earn an above-average and growing income stream over the long run. I believe that objective remains intact, and I am therefore content to continue owning this A+ rated blue-chip. This recalls a comment the venerable Peter Lynch once made about IBM. Peter said, and I quote: “no manager has ever been fired for buying IBM.”

What About IBM’s Future?

To be clear, I want to restate that I purchased IBM for its above-average yield and for the safety that I perceive relative to that yield. In other words, I originally believed – and continue to believe – that IBM is fully capable of offering me an above-average generation of spendable dividend income that is growing faster than inflation. Furthermore, I do consider IBM undervalued, and as a result, I am not concerned about losing a great deal of money on this investment over the long run. In other words, I believe IBM’s problems are already priced into their stock. On the other hand, I am not willing to rule out the opportunity that IBM will deliver on its strategic imperatives for growth, thereby providing exceptional long-term total rate of return in the future. However, I also realize that I will need to be patient that will not occur overnight – if it ever occurs.