IBM: Even Veteran Players Turn Around Eventually
Summary
- IBM has a new CEO - finally.
- IBM's acquisition of Red Hat was the right thing to do.
- IBM's ever growing 5% plus dividend is another plus.
- Looking for a helping hand in the market? Members of Turnaround Stock Advisory get exclusive ideas and guidance to navigate any climate. Get started today »
On November 5, 2018 I wrote an article on IBM (NYSE:IBM) called "No, IBM Did Not Overpay For Red Hat" and I recommended purchase. The price on that date was about $123. The price then went up and exactly 15 months later on February 5, 2020 the price peaked at $156. Add in the $7 in dividends over that period and we had a nice gain of $40 or 32% over the 15 months.
And then the world came to an end and IBM dropped briefly below $100. It now stands at $122, almost exactly the same as the November 5, 2018 price.
Here are 5 reasons to buy IBM again.
1. There's a new sheriff in town - CEO Arvind Krishna
On January 30, 2020 IBM's board announced that long-time CEO Ginni Rometty was stepping down and would be replaced by Krishna on April 6.
Krishna is currently senior VP for Cloud and Cognitive Software.
Equally as important the board also announced that former Red Hat CEO James Whitehurst would be named President.
Both these guys are leading-edge executives with huge expertise in leading-edge cloud and Linux technology. Exactly the right people for the job.
Rometty, on the other hand, was about as dynamic as an amoeba after a big lunch. She saw her mandate as holding IBM together while it spent years trying to reclaim some semblance of technical expertise. Well, if putting these two people in charge was the result, then that is a good thing. But boy, am I glad to see her go. I only wish her sterling 40-year IBM career had been a sterling 35 years instead.
2. New acquisition Red Hat will add expertise and sales to IBM's current product line including cloud
As I explained in the article referenced above, buying Red Hat was exactly the right thing to do. It helps legitimize IBM's technical bona fides and provides a high-margin product that can grow the business including the consulting business. Not only that but IBM now employs all the high-tech people from Red Hat without any recruiting effort including IBM's new President James Whitehurst.
Red Hat is already showing growth with 24% revenue growth in the 4th quarter. And they are boosting IBM's cloud business too.
3. The 5.2% dividend has been raised for 24 straight years
No reason to think that will not continue over the coming years. So sit back and watch your divvy grow while these new, young technocrats drive the share price higher.
Per IBM CFO Jim Kavanaugh:
"We've now increased our dividend per share for 24 consecutive years, and we remain committed to growing our dividend."
And, oh, did I mention $12.5 billion in FCF (free cash flow) for 2020. That's about $14 per share of FCF or less than 9x the current stock price. Note that FCF exceeds the EPS of $13.35.
4. IBM's Z-Series mainframes - the gift that keeps on giving
IBM has been making mainframe computer systems since the 1950's about as long as Sugar Frosted Flakes. Talk about brand management.
The latest series is called the Z-15 introduced last November. IBM does not break out Z related revenue but a good guess would be at least a very high-margin $5 billion a year. And with Red Hat now in the stable, it's probably growing from there. That's because Z Series is famous for running 1000's of VM's (Virtual Machines) at the same time. In many installations, Red Hat will be running on the majority of those VM's thus adding high-margin revenue to the Z-Series.
I have a friend who is high-up in the IT department of a very large financial institution and I asked him how long his company would continue to use IBM mainframes. He said at least 15 years and maybe forever.
Here's a quote from a user:
"When we talk to clients, certainly security and trust are the two biggest things. (With IBM Z) there has been absolutely no security breach over the past 15 years."
I don't think any other hardware manufacturer can say that.
5. 25 years of patent dominance says something about IBM's research capabilities
In the high-tech world, research on future products is a critical resource. Leading the world in patents for 25 straight years is a sign IBM knows this better than most. With new leadership, I think this vital asset will be used to grow revenue from new technologies and licensing going forward.
10 US Companies Granted The Most Patents In 2019
| Rank | Company | Number of US patents granted in 2019 |
|---|---|---|
| 1 | International Business Machines Corp. (IBM) | 9,262 |
| 2 | Samsung Electronics Co., Ltd. (OTCPK:SSNLF) | 6,469 |
| 3 | Canon Inc. (CAJ) | 3,548 |
| 4 | Microsoft Technology Licensing LLC (MSFT) | 3,081 |
| 5 | Intel Corp. (INTC) | 3,020 |
| 6 | LG Electronics Inc. (OTC:LGEAF) | 2,805 |
| 7 | Apple Inc. (AAPL) | 2,490 |
| 8 | Ford Global Technologies LLC (F) | 2,468 |
| 9 | Amazon Technologies, Inc. (AMZN) | 2,427 |
| 10 | Huawei Technologies Co., Ltd. | 2,418 |
Source: worldatlas.com
How I am playing it
I bought shares today and am looking for at least $150 within 12 months. If it doesn't reach that price point, I will look at facts on the ground and decide whether to hold or sell.
I am planning on IBM being a medium-term hold somewhere between 12-18 months unless facts on the ground change considerably during that time period.
Risks, alarm bells and red flags
In this volatile market, all investment decisions deserve extra caution. There is nothing wrong with being in cash at this point in time until the market shows less volatility and more firm direction.
In addition, there could be a recession coming or even a depression according to several economists.
"Economic data in the near future will be not just bad, but unrecognizable," Credit Suisse economists led by James Sweeney wrote last week. "Anomalies will be ubiquitous and old statistical relationships within economic data or between market and macro data might not always hold... There is no blueprint for the current shock, and uncertainty about the extent of contagion and the economic consequences is overwhelming."
Caution is the investment word of the day.
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Analyst’s Disclosure: I am/we are long IBM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (82)
QQQ +252.18% $35,215Wow. That's an eye-opener!Given this performance information and the fact that you've said that you're an IBM reseller, can you provide some insight as to why IBM has so greatly underperformed since you first began providing IBM Marketing talking points with links to IBM PR videos? I think this information could be greatly beneficial to investors here.
I'm also a Long-term IBM investor. What's your excuse? PS Its a bit late to start playing the victim
2.What is it you think you'll achieve?
3.Do you think you'll achieve it in your lifetime?
But to have a strong wind in the sail getting us to 2025 is also great, it will provide sustained cashflow, and also a solid base for the what i m really bullish about IBM: cognitive and AI market, i think in the coming decade cloud business will mature and comoditze with lower margin while business inteligence and general AI and applyed AI will really start to kick off with mutliple evaluation per revenue going sky high like mobile in the 2012 and cloud lately. AI could replace as many worker as computer with word or exell did. How much would that worth for business, well look at microsoft. I can't be sure IBM will be the "one ring to rule them all" but it should be in the top 5 for sure, + looking at rjeir track record they will get there with financial discipline and returning cash to shareholder all along rather then a merger dilution style.
Bird and Jordan, Gronk and Brady get to see one of those duos hopefully.
Nobody is going to be using mainframes in the public cloud -- it's not a viable option for doing computing at scale. If it were, hyperscale companies like Google, Facebook, and Amazon would be using them and they would be a huge growth market for IBM. But that's obviously not the case. IBM's best hope of seeing mainframes used in cloud computing is to slap a "private cloud" label on what its legacy customers are doing in their own data centers sort of the same way that it has always generated a significant portion of its cloud revenue. Officially, IBM made $21.2 billion in cloud revenue last year, a number that would put them way ahead of both Azure and Google. In reality, no one mentions IBM as a cloud player in the same breath as Azure or Google.
A blockchain video in the middle of a mainframe discussion! How cool is that!? Although my information is that all of IBM's blockchain services will be running on quantum servers and that the infrastructure will be fully in place by the time the first real customer shows up.
IBM does generate revenue from the patents in the form of intellectual property licensing fees that are typically on the order of a billion per year. For years, IBM has gone after other companies demanding payments for real or imagined infringements of its vast patent portfolio. It also sells some of its patents to patent trolls. So at least it's getting something out of the $6 billion per year it spends on R&D. Some companies have sufficiently large patent portfolios that they can use to fend off IBM since IBM will likely be infringe on some of their patents. (But then you can make money via patent trolls and patent privateers.) However, companies with small patent portfolios are vulnerable and often have to pony up some money. Most of the time, the negotiations and payments are confidential, but IBM's case against Groupon was rare in that it actually went to trial in 2018 before it was settled and thus shed some more light on IBM's patent practices than is usually the case.
www.computerweekly.com/...
I guess if you're old and want to appear young and cool, nothing beats a toupee and some graffiti. As for IBM's dividend growth: Seems like it has dropped below the rate of inflation, which must suck if you are a retiree and using the dividend for living expenses. Here is the growth of IBM's quarterly dividend 2010-2020:
2010: $0.55 => $0.65, 18%
2011: $0.65 => $0.75, 15%
2012: $0.75 => $0.85, 13%
2013: $0.85 => $0.95, 12%
2014: $0.95 => $1.10, 16%
2015: $1.10 => $1.30, 18%
2016: $1.30 => $1.40, 8%
2017: $1.40 => $1.50, 7%
2018: $1.50 => $1.57, 5%
2019: $1.57 => $1.62, 3%
2020: $1.62 => $1.63, 0.6%
What's the next number in this sequence?As for the new CEO: It's the guy behind IBM's cloud push that was so inadequate that the company had to acquire SoftLayer and Red Hat.Like Stan Druckenmiller said in 2013 when he was short IBM while Warren Buffet was accumulating the stock at around $180 per share: If you want to be long innovation, go long Google; if you want to short innovation, go long IBM. (GOOG was about $520 at the time.)
If you believe I'm someone called David_A, you are mistaken. And I'm really sorry about that since it was the most convincing bull case for IBM you have presented so far.
- Rich AI and Analytics capabilities collaborating on Healthcare.
- Pioneer in exploring blockchain tech.
- Redhat acquisition and monetizing out of Openshift.
- New CEO and President, one with solid cloud background and the other Redhat. IMO, Buffetts timing the entry and exit of IBMs stock wasn't accurate. Long IBM! Keep on Dripping...
His entry timing was certainly bad but he made a good decision to exit when he did. He think he got out around $170+ a share so he avoided a huge loss.
Contenders (10-24 years)
Challengers (5-9 years)The Dividend Champions list was created by David Fish in 2007 and is currently maintained by Justin Law.
The Dividend Champions List is wider in scope than the well-known S&P 500 Dividend Aristocrats and Nasdaq Dividend Achievers.
