Dear Mr. Berko: Two years ago, I bought 300 shares of IBM at $211; it’s trading at $139 now, and I’m $21,600 behind the eight ball. Should I hold or sell? And what do you think of Southern Co. now that it has bought AGL Resources? I own 1,350 shares, which I bought in 2001 at $28.
— J.L., Jonesboro, Ark.
Dear J.L.: IBM was founded in 1910 as Computing-Tabulating-Recording Co. It manufactured and sold commercial scales, industrial time recorders, meat and cheese slicers, tabulators and punch cards. In 1924, Thomas Watson Sr. changed its name to International Business Machines (IBM-$139). IBM began to lose its growth cachet about 17 years ago, and its legacy operations haven’t fared well in the past 15 years. Virginia Rometty, who became CEO in 2012, has been engaged in a failed multiyear effort to have IBM reinvent itself. “But tell me,” said professor O. Leo Leahy, Ph.D., from Kokomo, “how does one ‘reinvent’ an $83 billion-revenue company?” Perhaps Tim Cook should have remained at IBM.
During the 1970s, ’80s and ’90s, IBM traded authoritatively between 25 and 30 times earnings; however, in the past 12 years, the price-earnings ratio has fallen by half. For at least a decade, previous management has successfully resisted the urge to grow its revenues. Instead, management tried massive layoffs, lowered research spending, cut sales commissions and reduced employee benefits before moving half its workforce overseas where labor costs are lower. It helped, but just a bit. Then management eliminated most of its non-core products, culled its heretofore bulletproof executive suite and instituted multibillion-dollar share buybacks. As a result, IBM’s dividend in the past dozen years has increased eightfold as revenues have ignominiously declined. The dividend, now $5.20 and yielding 3.7 percent, has increased every year since 1996. So IBM has become a dividend growth stock rather than a principal growth stock. Revenues of $83 billion this year are lower than those two decades ago, though net profit margins have zoomed to 17 percent from 9.1 percent in 1996. Today, competitors are eating IBM’s lunch; it isn’t the admired, classy and unstoppable behemoth it used to be. The revenue consensus for 2016 is $82.5 billion, and the dividend is likely to increase to $5.50 next year on improving net profit margins.
Unless IBM becomes a takeover candidate, it won’t return to your $211 purchase price, which was 72 points ago. A friend of mine, corporate profiler Graciela Lupinsky, sourly notes that though Warren Buffett’s Berkshire Hathaway owns 79 million shares, only two open-end mutual fund families think highly enough of IBM to own the stock. Graciela believes that IBM shares won’t change much in the coming couple of years. She recommends selling your 300 shares now and registering a $21,600 loss. You could repurchase them 31 days later if you prefer dividend growth.
