A lot of writers, including many at InvestorPlace, began pounding the table for stock in International Business Machines Corp. (NYSE:IBM) after earnings that beat analyst estimates.
The company formerly known as Big Blue earned $2.726 billion, $2.92 per share, on revenue of $19.153 billion during the quarter. This compared with earnings of $2.853 billion, $2.98 per share, on revenue of $19.226 billion a year earlier.
Notice something about those 2016 numbers? They were bigger than the 2017 ones. IBM is still declining, while the technology business is surging as it never has before.
My question is, if you can’t grow in this business environment, what are you going to do when the environment changes? And it will change. IBM remains a laggard in an industry that punishes laggards like no other.
Why So Down on IBM?
My problems with IBM are fundamental, going to the heart of how it does business.
IBM has always made its money by taking problems entirely out of customers’ hands. This is the kind of attitude that leads to disasters like Equifax Corp. (NYSE:EQX). To succeed, customers must be full partners with their vendors, taking responsibility for managing their infrastructure.
This is not the IBM way. IBM has always told customers, “bring your problems to us and we’ll solve them.” That was the essential claim of Watson, its cloud front-end. Ask the cloud a question and Watson will answer it.
Clouds don’t work that way. Watson has been a failure. It has not delivered the ease it promised because it is basically a user interface. Have you noticed IBM’s current advertising? It’s all built around blockchain.
Blockchain is the market of the moment, and IBM is doing things with blockchain. But it’s not doing as many things with blockchain, or as well, as Microsoft Corp. (NASDAQ:MSFT). So I own Microsoft.
My other problem involves its financial management. IBM is more interested in extracting profit, and maintaining its dividend, than in growing. It has been shrinking ever since Virginia Rometty became CEO in 2012. This was once a $100 billion sales company. Now sales are below $80 billion.
Instead, IBM has steadily increased its debt-to-assets ratio, $45.6 billion in debt on $121.6 billion of assets as of September 30. It buys back shares to make earnings per share look good, and hands out cash to stockholders to keep them in the game.
On Rometty’s watch the dividend has nearly doubled, from 85 cents per share to $1.50 per share each quarter, the yield growing to nearly 3.9%. But there’s an old tech saying: If you’re handing money to shareholders, maybe you don’t have anything better to do with it.
IBM Remains Fundamentally Wrong
My negative view on IBM is fundamental. I don’t care if it beats the earnings whisper for the fourth quarter, $5.17 per share of earnings on $21.97 billion in revenue.
This puts me in the distinct minority among my colleagues, people I uniformly respect.
Will Healy sees IBM evolving in cloud, which should drive the stock to new heights. Tom Taulli sees it finally getting traction with its restructuring. James Brumley says its transition is nearly complete. Bret Kenwell says the price is in the sweet spot. Laura Hoy calls it ready to surge. Josh Enomoto sees underappreciated, long-term potential.
If you are an income investor, and you have held IBM shares for its dividend, you have done well. The dividend never dropped during the last financial crisis, and now stands nearly four times higher than it did then, while the shares have doubled in value.
But this is a tech stock being run like a smokestack industrial. IBM’s gains over the last 10 years trail those of the Dow Jones average, even with their recent run-up, even including the collapse of the averages during the Great Recession.
IBM is not the kind of tech stock I like to own.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in MSFT.