Big Blue – I’m Adding You

Big Blue

cloud

Big Blue – I’m Adding You

Hey everyone

A little late to post but last week I made another purchase in our rrsp account. This is a stock I already held a small position in and wanted to grow but felt there needed to be some changes first. Well there were some nice changes recently.

The stock is IBM.

This one clearly has its fans and haters, but I think after their recent quarter things are turning around and the risk/reward ratio is worth it.

About IBM

International Business Machines Corporation (IBM) is a technology company. The Company operates through five segments: Cognitive Solutions, Global Business Services (GBS), Technology Services & Cloud Platforms, Systems and Global Financing. The Cognitive Solutions segment delivers a spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive Solutions includes Watson, a cognitive computing platform that has the ability to interact in natural language, process big data, and learn from interactions with people and computers. The GBS segment provides clients with consulting, application management services and global process services. The Technology Services & Cloud Platforms segment provides information technology infrastructure services. The Systems segment provides clients with infrastructure technologies. The Global Financing segment includes client financing, commercial financing, and remanufacturing and remarketing.

(Source – RBC Online Banking)




Red Hat

Big Blue is a massive company but has under performed its peers for a long time. I think the old ceo was a big part of this reason. Although I’ll give her credit for the red hat acquisition. Do I think she paid a steep premium for sure I do, but this may be exactly what IBM needed – a solid growth vector.

In the past big blue has been throwing money left right and centre at share buybacks, which lead to lack of growth in the company. Now they are using that money for growth which the market will enjoy in the coming quarters I think.

While the recent acquisition created a tonne of debt, they paid off 10 billion in debt since the red hat acquisition already. That is pretty impressive and something I loved to see.

This quarter they posted a very miniscule revenue growth of .1%, but some growth rate non the less. Hey they have been posting negative growth rates the last 5 quarters. Red hat was a big factor for this. Total cloud revenue was up 21 % year over year.

I think this will continue moving forward but obviously your competing against some of the other top guns of tech and they have more cash on hand to work with. But those stocks aren’t trading for nearly as cheap as IBM is at the moment.

Valuation

Currently IBM is trading at roughly 10.95 times its 2020 earnings estimates and offers a 4.17% dividend yield at today’s price. Huge for a tech company. IBM has also raised their dividend for 24 years and most likely will again in April, making them a dividend aristocrat. This should be very positive for them, as we all love to buy aristocrats and kings. I think their next raise will be in the 3-5% range as they focus on paying off that debt, which I fully support.

The Buy

We previously has 18 shares but decided after the new ceo news and recent quarter to increase that position to 28. We bought 10 shares at $147.02 per share last week. This added 68.40 usd to our forward income. Our Dividend Portfolio has been updated.

Conclusion

I have wanted to increase our sector weighting in Tech this year and with this recent news I’m happy to add to our previous position. Some would rather watch the next couple quarters before investing in Big Blue, which isn’t a bad idea. I think the risk to reward in this situation is too good to pass up. Will the new ceo be the next Satya Nadella? Haha Here’s Hoping!

If your interested in reading more about IBM Nicholas Ward wrote a nice article about them on seeking alpha, you can read that here.

Long – IBM

Cheers!

What do you think about ibm? and their recent results and changes?




 

8 Responses

  1. Hey Rob,

    If they can maintain that Yield and continue to grow their dividends, it’ll make for a good long-term holdings. They’re also doing a lot in the Storage for AI and big data space. With the advances in AI, all that data will need to be stored somewhere.

    -DGX Capital

    • Rob says:

      hey dgx

      yeah ibm is all over the place. I love the ai space and keep trying to decide which companies may be the best investments in that sector. Debating a chip maker.

      Its hard to buy tech stocks at the moment, not much value out there.
      cheers

  2. I randomly heard a comment on CNBC this morning stating that Amazon’s cloud revenue accounts for only 10% of their total revenue…BUT it accounts for some 60+ percent of their overall profits. This is a testament to how important that redhat acquisition was and why it’s comforting that IBM is focused on cloud.

    • Rob says:

      hey

      Also points out just how competitive this area is going to get. Would be cool if somehow IBM got that pentagon contract now that it has been re-opened. (really long shot) haha

      cheers passive

  3. PCI –

    Nice job and have held IBM for a LONG time. Luckily was able to average way down and grab shares when they were below $120/share. Love the Red Hat acquisition and think that should be a quiet and incredible jolt to their performance results.

    -Lanny

    • Rob says:

      thanks Lanny

      That’s a nice price to have bought them. I think the red hat move was a game changer. Just hope the space doesn’t get too competitive before ibm really proves their worth.

      cheers bud!

  4. Nice buy, Rob! I am a fan of IBM and their Red Hat deal. I used to hold IBM years ago. In fact, IBM was one of my largest positions at one point. I sold because I needed the money during my year off work. But I also liked their buybacks, dividends, and high profit margins.

Id love to Hear What You Think

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