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Let's Make IBM Understandable To You

|Includes: International Business Machines Corporation (IBM)

I will help you to understand the rationality behind IBM holding and the reason Buffet has it. And I. Since I'm less important than he is I will just explain why.

Let's assume you have a company, an up and running company. Every year you earn the same amount. It sums up. After a while you ask yourself- What should I do with that? And the answer comes to mind- I'll make son acquisitions! Or if you are IBM manager you think from more than one owner of the company (shareholders) you buy shares! And why do you buy shares? Because the business is up and running. And with the same amount comes in and less shares at the market the EPS is growing. It's not so easy to understand since it's a tricky and from "Screener" point of view, the growth in net income is not happened, but the growth of the EPS is the most important to the shareholder. This is the return he asks for.

Let's not say that IBM is a giant and everyone need it just because of it. Let's just say that IBM make sure that the shareholder receive a conservative return for the holding. What is conservative? If you'll receive 2.5% in dividend plus 5% EPS growth (which is half of the last 5 years, I want to think that worse is coming, that's much helpful then believe of good to become) and you buy a profitable company with PE of 10. By the way - this PE of 10 is your margin of safety in the IBM case. The PB is not relevant and the debt level is sensible.

My conclusion: Think solid, earn the profit.

Disclosure: The author is long IBM.