IBM Corp.: Why Warren Buffett Isn’t Selling IBM Stock
IBM Stock: A Top Pick for Long-Term Growth
These are tough times for International Business Machines Corp. (NYSE:IBM) stock. In the past five years, IBM stock has done nothing for investors if you just consider the capital appreciation matrix. It’s down about 16% during that period, and in the much shorter horizon, it hasn’t budged an inch.
Is this performance enough to convince you to shun this 105-year-old tech giant also known as “Big Blue”?
I don’t think so. IBM stock perfectly fits into my investing philosophy, which is to find opportunities that generate long-term and stable income for investors who believe in the company’s direction and its fundamental strength.
IBM’s current dismal performance represents one of those periods when companies struggle to reinvent themselves as technology, behavior, and consumption patterns change much faster than their speed of embracing the changes.
The older computing technology on which IBM built its dominance in the past century, such as servers and mainframes, is becoming obsolete. Instead of investing heavily in these products, IBM’s largest clients are outsourcing their data management services to cloud computing. And IBM knows that its future lies in cloud technology and artificial intelligence.
As for why you should stick with your investment during this testing time for this Armonk, New York-based company, IBM has defended its policy of rewarding its investors with regular dividend payouts and increasing its per-share income through a massive share buyback plan.
IBM Stock: Massive Share Buyback Boosting Values
During the decade through 2015, IBM spent $119.0 billion on buying back shares. IBM’s stock, during that time, returned 103% with dividends reinvested. (Source: “Opinion: 10 U.S. companies that threw away money on buybacks,” MarketWatch, May 2, 2016.)
This strategy has been widely criticized by some who point out that IBM is sacrificing its growth by artificially boosting its income per share. Share buybacks reduce the amount of outstanding stocks, a practice which can help companies to protect their share values at a time when sales growth has stalled. This helps existing investors because they earn more on a company’s future profits.
But if you’re a long-term value investor, share buybacks are your best friends. And the world’s most successful investor, Warren Buffett, knows this more than anybody else. Buffet’s holding company, Berkshire Hathaway Inc. (NYSE:BRK.A), has an over-eight-percent stake in IBM, making it one of the firm’s largest holdings.
In an interview with CNBC earlier this, Buffett boasted about his stake in IBM, saying he never sold a share of the company. “I think I can safely say we would be much more likely to buy more in the next 12 or 24 months than we would be to sell shares,” he said. (Source: “Buffett: We’ve ‘never sold a share of IBM’ and might buy more,” CNBC, May 2, 2016).
Final Word on IBM Stock
Sooner or later, IBM Chief Executive Officer Ginni Rometty’s strategy to transform her company into a leading cognitive solutions and cloud platform provider will work. And during this period, I don’t think you will need to worry about IBM’s ability to continue paying dividends. IBM generates enough cash to make the investments required to drive this transformation while continuing to return significant capital to shareholders. Since 2010, IBM has more than doubled its quarterly dividend per share to $1.40 from $0.55 a share. (Source: “Dividends (2010 – ),” International Business Machines Corp., July 28, 2016.)
Yielding at 3.7%, I think IBM stock is of the best tech companies to hold and position yourself to gain when its transformation starts to pay off. I think this is what Warren Buffett is betting on, and you’re unlikely to go wrong if you follow his instinct when it comes to investing.