Love it or hate it, the revolution in information technology is not going anywhere.
In fact, it’s accelerating. There’s cloud computing, a collective term referring to businesses running their operations via shared resources and the internet, and blockchain technology, which is being used as a more secure way store records and record transactions. Then there’s artificial intelligence, or AI, which utilizes self-learning machines to improve all sorts of business processes.
There’s no doubt we live in a rapidly changing and increasingly complex world.
But as I tell my premium readers over at The Daily Paycheck, as income investors, we don’t have to stand idly by watching these new technologies change the way most businesses operate and most consumers function. Income-oriented investors can participate in the future, too, even without giving up much dividend income.
I believe that some companies such as a 4.4%-yielding International Business Machines (NYSE: IBM), while having cheaper valuations because of past missteps and/or the weight of the older “legacy” business, do have significant potential to play a role in the future and make money from the advances in modern technology.
The Case For IBM
It’s not a given that IBM will do well going forward. However, based on its recent earnings reports that show early signs of a stronger showing in its growth businesses — called “strategic imperatives” by the company — and also based on the fact that IBM is one of the cheapest IT-related stocks, trading at less than 11 times forward earnings and yielding 4.4%, I strongly believe that today’s investors have a decent shot at future gains with IBM.
If the business turnaround and the investment in the “strategic imperatives” hold, any new investor, at the stock’s current levels, would be buying the company’s improving growth very inexpensively.
In other words, at current valuations, with almost no future growth expectations incorporated in the market share price, any improvement in IBM’s business should reward investors quite nicely.
It might seem strange to take this bet at this time, however, considering that IBM used to have one of its strongest fans in Warren Buffett, who recently gave up on the stock, selling his entire position.
But we cannot follow Buffett blindly, can we? First, Berkshire Hathaway (NYSE: BRK/B) has no need for dividend income, per se, while income investors should not ignore the 4.4% dividend (and IBM’s strong dividend commitment).
Second, IBM just hiked its dividend by about 5% in April 2018. It’s nearly doubled the size of the payout over the past six years (from $0.75 quarterly per share in 2011-12 to the current $1.57 per share).
Third, Berkshire Hathaway has ways to invest that are not available to individual investors — buying entire companies from public and private sector alike. And, finally, from 2010, when the position was first opened, Berkshire collected an estimated $1.7 billion in dividends — an amount that cannot be ignored.
In fact, as far as the dividend income goes, IBM has always been one of the most reliable payers on the market, having increased the size of the payout for the past 22 years.
This almost qualifies it for a spot in the Dividend Aristocrats list, which comprises companies that have increased their dividend for 25 years in a row.
I believe IBM will soon join that list.
And what about the future?
With its colossal patent portfolio (IBM has more patents than any other U.S. technology company), research laboratories, a world-famous super-computer and cognitive platform Watson, and its strong investments in modern technologies and improving focus on the future, IBM is likely to accelerate its per-share profits and restore its revenue growth.
In fact, the latest reported period (Q1 FY 18, reported on April 17) was much better than you might think, despite the market’s negative reaction (the stock declined 8% mostly on higher spending and a lower margin outlook).
Quarterly revenue for IBM grew in 70 countries around the world, an indication of improving enterprise demand. Moreover, the reported quarterly revenue growth was positive for the second quarter in a row (after five years of declines).
Yes, the company is investing heavily in future growth. But that’s OK because, without these investments, the overall business would continue to slow.
Heavy R&D investment is a must. In fact, it’s something that not only creates a new foundation for the future, but also the basis for business differentiation. Further, the need to have a knowledge-based foundation and intellectual capital, on top of the money spent, will play an increasingly important role in the technology of the future, such as AI.
This only stresses the importance of a strong financial and intellectual base for any company to participate in the future of technology. And IBM looks like it has learned this lesson and is prepared to do what’s necessary.
With a healthy outlook for 2018 (full-year expectations call for “at least” $13.80 in operating earnings per share and $12 billon of free cash flow), and a long-term outlook for low-single-digit revenue growth and high-single-digit growth in per-share earnings growth, IBM can afford to invest in the emerging technologies businesses (the cloud, AI and security) while paying a strong dividend and continuing to buy back shares.
When you add up these factors, I think there’s a strong case to be made that IBM deserves consideration for value-minded investors, but most especially for income investors. That’s why I added shares of the company to my portfolio in The Daily Paycheck on May 30. You might want to consider doing so as well.
While you’re at it, remember that IBM is just one of dozens of holdings that my readers and use to earn “paychecks” of hundreds — even thousands — of dollars each month. And it’s all thanks to the carefully designed, easy to use, Daily Paycheck System.
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