Last week, I reported on an icon of American business, The Walt Disney Co. (DIS). This week, I want to report on another: International Business Machines (IBM).
Once upon a time, IBM dominated the computer industry to a remarkable degree, but the days of IBM's dominance almost seem like a fairy tale today. Since the advent of the microcomputer and particularly the personal computer, IBM has had to transition at various times to find its place in the technology firmament. Large mainframe systems and the software that run them, IBM's bread and butter, have lost their dominance to smaller, cheaper, more efficient alternatives.
Since the early 1990s, IBM has refashioned itself as a service provider. More recently, it has focused on such areas as data analytics, artificial intelligence, security and cloud computing. The falloff in the sales of the old and the growth of the new have not been in synch; witness the company's recent reporting that quarterly revenues were down 9% and net profits fell 17%, while the new areas, for the full year, increased 26% and now account for 35% of IBM's corporate sales, according to The New York Times.
IBM is in transition, and the transition may not be proceeding as quickly as some might like, but it is moving ahead. No doubt, there will be pain from making such a transition, such as the investments required for the new initiatives, but the company seems on track to transform itself in ways that will enable it to meet the demands of the new marketplace.
This is all positive, and provides reason to seriously consider buying IBM stock at this time. Another motivator should be the endorsement of IBM by my James P. O'Shaughnessy strategy. More than a dozen years ago, I completed the automation of a number of investment strategies as spelled out by their creators in books they authored (or, the case of Warren Buffett, a book written about him).
O'Shaughnessy, a noted strategist and mutual fund manager, was included among these strategists, and it is the strategy I based on his writings that strongly recommends IBM at this time. It likes the company's huge market cap (about $120 billion), strong positive cash flow, large number of shares outstanding and its uber revenues, which are about $82 billion.
The strategy looks at all companies that pass these hurdles and picks the top 50 based on their dividend yield. With a yield of 4.24%, IBM makes it into this top-50 cohort.
Sure, investing in IBM is risky, as is true with any company in a fast-changing market that must transition from its old products and service to new ones. But with IBM's track record of transformation, its financial power, its universally known name and the O'Shaughnessy strategy's endorsement, this is a timely moment to step into the world of Big Blue.