In my last quarterly portfolio update (Q4 2013) I mentioned that I had been monitoring IBM's progress or lack thereof. International Business Machines was the weakest performer in the DJIA for all of 2013. I have been a fan of Big Blue for some time but its lack of top end growth regardless of bottom line performance was slightly troubling. IBM has claimed to be focusing on higher margin sectors and slowly divesting itself from its weaker divisions. This effort along with stock buybacks has helped IBM increase bottom line performance greatly over the last few years. It has however had a negative impact on top line performance. You can only grow bottom line numbers by consolidating for a short period of time. So on January 1st of this year I evaluated my IBM position, which was 10.6629 shares at a cost basis of 187.56 per share, to be an unfavorable position. As negative market news began to accumulate in early January I decided it was time to dump Big Blue and replace it with another tech stock.
I decided that I would not take a loss on my stock because it was still a value investment should further price decline happen. In early January I place a limit sale order for all of my IBM shares at $190.00. This limit order was executed on 1/17/2014. Including Dividends for all of 2013 and the profit made from the IBM sale I made a total of $48.69 from IBM for all of 2013. This was a net gain of only 2.4%, but any gain is better than a loss.
In order to keep my porfolio balanced I needed to replace IBM with another integrated tech company. I currently have three dividend paying tech companies on my income watchlist: Cisco Systems (CSCO), Oracle (ORCL), and Microsoft (MSFT). A quick look at these three companies based upon current statistics make choosing a replacement stock very easily. I will look at the current P/E, P/B, and P/S ratio's as well as the current dividend yield
As you can see from the table above CSCO is better in each of the 4 metrics we evaluated. At this time we judge CSCO to be a better value than any of our other tech companies currently on our watch list.
I have had my eye on Cisco for some time and with my divestiture of IBM I felt this was a perfect time to open a position in CSCO. I evaluated CSCO's performance over the last couple of years and they have all the markings of a stock that fits perfectly in my portfolio. Below were some of the points that I used to evaluate CSCO.
- Revenue has increased 34% over the last 5 years (IBM's revenue has increased 4.1% over the last 5 years).
- Net Income has increased 62% over the last 5 years (IBM's Net Income has increased 22.7% over the last 5 years).
- Share Count has decreased by 8.1% over the last 5 years (IBM's Share Count has decreased by 17.9% over the last 5 years).
- Current dividend yield of 3% (IBM's current dividend yield is 2%).
- Earnings Per Share has increased 77% over the last 5 years (IBM's has Increased by 49% over the last 5 years).
- CSCO has in past earnings statements identified significant market headwinds that will make future growth more difficult (IBM has acknowledged similar market headwinds as well).
CSCO is better than IBM in all of my evaluated metrics except share repurchases. I bought $2,000 worth of CSCO stock on 1/28/2014 at 21.90 a share.
Buying Back Into IBM:
I may revisit owning IBM in the future should potentially one of two things happen.
- It drops far enough in price to be determined a dividend value investment (Div Yield > 3%).
- Its revenue picture improves above current prospects (accelerating Y/Y revenue growth).
For those of you who follow my quarterly portfolio updates here is the net effect that it had on my portfolio in the first quarter.
I believe that replacing IBM with CSCO will have a positive ripple effect on my portfolio for years to come and plan to track both stocks on a comparison basis to determine if I made the right decision. Please post your thoughts in the comment section below.