I Added Shares To This Troubled Tech Company:

IBM-Intel-logoToday I added 9 shares to my position in International Business Machines (IBM).  I originally bought this troubled company in September at a per share cost basis of $192.34.  The company recently made a major announcement regarding yet another business divestiture and stated its forward earnings goal will no longer be realized.  The stock price instantly saw a major decline, and I’ve decided to average down at $163.70 a share with a $6.95 commision for a total cost of $1480.25.  My cost basis per share decreases by 7.67% from $192.34 to $177.59.  The purchase also adds $39.60 to my annual forward dividends for a new total of $1,314.30.

The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.” ~Warren Buffett, Source: –  Businessweek, 1999

That’s some great advice there.  So how troubled do I find this classic blue chip company that has raised its dividends for 19 years?  It’s a very difficult question, and my only answer is that I like what they’re shifting their business to, which is big data, cloud, and engagement in social, mobile, and security areas.  They also have a massive collection of patents in each business segment and have been investing heavily in research and development, capital expenditures, and acquisitions to the tune of $133B this last decade.  Last year, 65% of their investments were focused on higher margin software and services as they move away from the lower margins of clunky hardware.  These investments should continue and even increase because of the company’s three recent major divestitures.  IBM has been around inventing and setting trends in technology for over a century, and I’m finding their current prospects too compelling a value to pass up further investment in the company.

This rosy sounding future that I’m hopeful for isn’t a guarantee, and it’s the past I always look at as an investor.  I’m not just looking at basic value investing numbers either, because earnings per share, share buybacks, and dividend growth have been well documented and stellar over the last decade through financial engineering.  Flat revenues are the most concerning to me as they’ve barely been increasing by under a single percentage point annually over this time and have been declining the since 2011.  IBM is such a huge company that it’s very challenging to move that needle, aside from the fact that they’re in the technology sector which is constantly changing.  However, this is still a profitable company, and I look at that as a very positive sign during this latest transition.  As long as they stay profitable, they’re not going anywhere.  Debt seems reasonably managed as well when compared to the amounts other massive blue chip companies have taken on these past years in this low interest rate environment.

To me, shares are far too cheap to ignore at this point.  My opinion on that hasn’t changed since I bought them at a much higher price in September.  This post is not an attempt at a full analysis or to sell anyone on this company.  I’m on a personal journey, and I’m writing this to look back many years down the road and reflect on why I made the decisions I made with the capital I worked so hard to earn.  I expect I’ll win some and lose some in the end, but balancing my risk is key.  I’ve got a long time horizon and am very comfortable taking on a few high risk/reward companies like my recent purchases of IBM and BP.

Aside from this purchase, I had another few transactions go through today in my no commision Loyal3 account.  I expect the remaining purchases to clear on Monday and will update my portfolio and get a post up about it then.

Here are some recent fast graphs of IBM:

2014_NOV_FG_IBM

2014_NOV_FG_IBM3

2014_NOV_FG_IBM2

2014_NOV_FG_IBM4

 

What do you think of IBM?  How much risk are you willing to take?

My Dividend Growth

http://www.mydividendgrowth.com

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20 thoughts on “I Added Shares To This Troubled Tech Company:
  1. writing2reality

    Great minds, think alike! I picked up nine shares myself earlier this week, and will have a post up next week about it. I found the risk/reward proposition to be strong enough to make an initial buy. While I don’t think the next 12-24 months will be the prettiest, they have a strong cash flow and more than adequate coverage of the dividend to allow for future increases.

    Keep on churning! You’ve got a shot getting close to the $40k mark of investments in one year if you keep up the pace!

     
    Reply
    1. My Dividend Growth

      W2R,

      Welcome to the IBM club! Even though this added to my existing position, the holding is so new that I haven’t even received a dividend yet. Should be a great time to let that DRIP for a while. Very cool that we both picked that same magic number of 9 shares and you got in at a great cost basis. I’m definitely prepared for some volatility over the next few years as the company finds its footing. I can’t help but wonder if this will be near the bottom of the range we see. I feel like any good news at this point will make the stock price pop a bit, then retreat back to these levels, but we all know there’s no way to predict those things. I’m excited to read your post about it. Excellent to see you’re amping up those purchases this month and they look so crisp with your new spreadsheets 🙂 40K would be amazing for my first year of aggressive investing, though I’ll probably come just short. If only I would have gotten my 26% raise at work earlier in the year, even by a month!

      Hope you’re having a great weekend!
      Ryan

       
      Reply
  2. No More Waffles

    Great purchase, Ryan!

    I’m also looking to add IBM to my portfolio as soon as I have some new capital available. I think IBM’s price point is rated for the worst possible outcome over the next couple of years, which seems highly unlikely to me.

    The fact that they’re still profitable, have an enormous backlog and can rely on a strong cashflow makes me believe they’ll be fine in the long-run.

    Cheers,
    NMW

     
    Reply
    1. My Dividend Growth

      NMW,

      It’s great to hear your similar thoughts regarding this dinosaur of a tech company. It’ll be very interesting to see how bad things really get and how long it’ll take to right the ship if at all. I personally see a lot of value here and think any good news will send this stock right back up in price. I never intended technology to be a major part of my portfolio, but if the price falls into the low $140’s I will be adding yet again. I’ll be eagerly watching to see when and if you pull the trigger on this one. Keep up the great work over there and it’s always great to hear from you!

      Best Wishes,
      Ryan

       
      Reply
  3. Dividend Mongrel

    Hey Ryan,
    I think IBM is a great buy right now. However I am a little biased in the Tech industry because I am around it all the time. I feel like MSFT and AAPL are going to continue being high flyers because so many businesses are at the mercy of those companies. The companies I work for are constantly paying hundreds of dollars for Microsoft software, such as MS office, project, and SharePoint. Then I see everyone I come in contact with own either an IPhone or IPad. In some cases both. I don’t really see where IBM is being used besides the systems at my local grocery store. No one I know spends money on IBM products so I don’t really understand if they aren’t making money from middle class. I guess I don’t really understand IBM. Any thoughts as to how they make income from the average middle class American?

     
    Reply
    1. My Dividend Growth

      DM,

      Thanks for sharing your thoughts! I’d love to hear any more information you dig up. From what I understand, most of IBM’s profits, revenue, and dealings are in corporate and business solutions that the average person would rarely see or hear of. If you can imagine it as a business or government, they can develop, make, and build it. Your grocery store example is great, or if you’ve used a physical ATM, or an online product shopping cart, they can manage that whole workflow from when you click buy to when it shows up at your door and so many other cool and crazy things not related to these at all! You can get a much better idea by visiting the product page at their website where they have all sorts of great info with pictures and diagrams of tons of solutions in many different segments that you might be familiar with: http://www.ibm.com/products/us/en/?lnk=mpr-0-usen. You can also explore their site to see some of the major partners they work with, like our own US government and AAPL and MSFT that you’ve mentioned. I’m a big fan of these behind the scenes companies and think of IBM like a tech version of utx or ge (building elevators, refrigeration/cooling systems, and aerospace—out of sight-out of mind type products). I personally like a company that is less reliant on developing the next best new “thing” like a smartphone or iwatch and hoping that it connects with the average joe. Those sort of products tend to trend in and out too quickly for my comfort level. That said, there is a ton of work this company needs to do to right the ship, but from everything I read, I really like where they’re going. Keep me updated on your research!

      Best Wishes,
      Ryan

       
      Reply
    1. My Dividend Growth

      That’s some great info in the article you linked. I highly recommend going straight to the source and reading from IBM’s website to get a much clearer representation of what this company does and who they cater toward.

      All My Best!
      ~Ryan

       
      Reply
  4. DividendMongrel

    Ryan,
    Thanks for the response and you couldn`t have put it any better than that. I will have to look into the company website for more information. Maybe they just dont need to reach out to the small consumers and focus more on the big business/government like you mentioned. Thanks for clarifying this for me because I noticed many bloggers buying IBM and I hope this turns out to be a great investment for you. I will see what else I can dig up. Thanks!

     
    Reply
    1. My Dividend Growth

      DM,

      Not a problem, I’m always happy to see you swing by 🙂 If you ever have any questions or anything please feel free to ask and I’ll do my best to answer or point you in the right direction. I’m new to this adventure too and will probably be asking you questions just as much! Very much appreciate you!

      Best,
      Ryan

       
      Reply
  5. Dividend Mantra

    Ryan,

    Nice job averaging down. That dropped your cost basis quite a bit. Awesome!

    I feel you here on IBM. I just think they’re priced for extremely low expectations, and I can’t imagine them not clearing that low hurdle. Little to no growth needs to be had for pretty solid returns from here. Anything extra is just gravy.

    Huge backlog, great results thus far in the fast-growing segments like cloud and mobile, and hardware is trying to hold on while the rest of the business catches up. I think they’ll be fine, but it might take a bit to really turn this massive ship around. In the meanwhile, we get to collect a healthy and growing dividend. 🙂

    Best regards!

     
    Reply
    1. My Dividend Growth

      Jason,

      I really appreciate it! I loved your post when you bought more recently as well and was on the edge of my seat waiting for some free capital just hoping that price wouldn’t pop back up right away. We’re on the IBM ride together and here’s hoping it pays off handsomely down the road! You’re a inspiration to all of us and I can’t thank you enough for always stopping by to comment and show your support.

      Best Wishes,
      Ryan

       
      Reply
    1. My Dividend Growth

      Tawcan,

      It’s very reassuring to hear an experienced investor like yourself finding value in my purchase! I completely agree and right now this business seems like it’s priced to fail with no growth expectations going forward. I’m really hoping they get their act together. Even just a little bit of good news could pop this way back up.

      Take care,
      Ryan

       
      Reply
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  7. Tad

    Ryan,

    This is interesting. I’ve seen other investors talking up IBM lately as well. To build on Dividend Mongrel’s point, the concern I have is that I run a web software company that is involved with a lot of the areas you mention “big data, cloud, and engagement in social, mobile, and security areas,” and IBM never comes up as a relevant player in any of these areas, with the possible exception of big data. It’s similar to the point about how no one knows any consumers who buy IBM products, but more concerning (in my opinion), given that their strategy is based on winning in these areas. I think they have properly identified these as important growth areas, but it is not at all clear to me how they plan to become relevant. The massive growth of recent startups shows that market success has little correlation to R&D expenditure (just $1 billion would have allowed them to fund all R&D costs of every Y Combinator company). I don’t understand why they don’t just buy some of the leaders (still relatively quite small) in these fields. As a non-rhetorical question, what gives you confidence that they will figure out how to win in these markets, given the intense competition in each and their current lack of leadership position (again, with the possibly exception of big data)?

    Cheers,
    Tad

     
    Reply
    1. My Dividend Growth

      Tad,

      I very much appreciate your comment and it’s great to hear from someone with experience running a web software company 🙂 I can see why you’d find it concerning that IBM doesn’t seem as interested in back end consumers as some of the other competing firms. I could be wrong, but in my research, I see it like they’re reaching them in more of an under the surface way, like how I invest in Target and Walmart, but they don’t make all of the products and profits that those stores sell and still come out way ahead by having great strategic business partners. When I look at it that way, the end user reach of IBM is a gigantic number when you consider all of their 140,000 worldwide business partners including other companies I invest in like Procter & Gamble, Visa, and even IBM competitors like Microsoft, Apple, Oracle, and Cisco. A more specific example is how in 2013, 80% of mobile applications were built using IBM software, so while IBM isn’t making the iPhone, Android, or even offering the wireless services of AT&T or Verizon, they still reach those back end consumers. Other reasons I see IBM staying and increasing relevance is its profitability which is up from 2009. Solid cash flow of 13 billion dollars last year to help with acquisitions (which I completely agree would be a better use than some of that R&D). In 2013, 60% of Fortune 100 companies used IBM social software. Cloud was up 70% year over year and they acquired softlayer. Patents, such as the 270 + for wireless inventions. Brand power is still important, like the recent partnership with Premiere Healthcare Alliance, who claimed to use IBM because they already used a lot of their hardware and software. I also like that IBM is still setting trends and inventing products, like the recent deal with Nvidia and the US government and their mission to build the fastest computer in the world. Also, their Watson program with its amazing progress in big data. All that said, I also feel IBM has a long way to go before they have solid growing revenues. But I do imagine them getting there again in the long run and to me the risk is too compelling to pass up. If I see those fundamentals remaining solid, a low payout ratio, and 19 year dividend growth streak continue, then I’m still in as a dividend growth investor.

      Thank you very much for engaging in your concerns with me, it means a lot that you’d reach out. Forgive me if I didn’t give you any new information there because I’m still a beginning investor. I hope you’ll stop by from time to time because I would be very intrigued to hear any other thoughts you have and I’m wishing you the most success with your investments and company! Ever need an awesome video editor, let me know 🙂

      All my best,
      Ryan

       
      Reply
    1. My Dividend Growth

      Alexg,

      Thank you! I find IBM’s stock price at these levels super attractive and priced for such little growth. Even we see zero or limited growth, we could still see about a 5% annual return over the next few years as they right that ship, not to mention those awesome growing dividends. Congrats on starting a blog, it looks great so far and it’ll be fun to follow along on your journey 🙂

      Take care!
      ~Ryan

       
      Reply
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