Is IBM stock ringing a warning bell or a dinner bell?
Quick! Ask people to name the first stock that pops into their head — odds are it will be IBM. Yet few of us can articulate IBM's business strategy nor weigh in on the company's future growth.
Despite being a household name, we rarely interact with IBM products in the same way we do those of other technology companies such as Apple or Samsung or Google.
Despite its name recognition, IBM has been an enormous disappointment to investors over the past five years. From March 31, 2010, through the March 31, 2015, the total return for the stock (including price appreciation and dividend income) has been 6.7 percent per year, significantly lagging the total return of 14.4 percent for the S&P 500. Five-year annual earnings growth registers at 10 percent (though the company recently missed its earnings guidance by almost 15 percent). The real concern, however, is revenue growth. Sales stalled at $107 billion in 2011 and declined to $93 billion in 2014. The company's headline, double-digit earnings growth has been achieved through what is popularly referred to as financial engineering (in IBM's case, share repurchases, which reduce outstanding shares and, consequently, increase the earnings per share without increasing the volume of earnings).
Poor performance has prompted many to bemoan the company's future and investors have scattered, sending the stock price into a swoon. By Friday's close, the stock traded at $160 per share, down from a high of $215 per share two years earlier. In my book, "The Women's Guide to Successful Investing," I introduce three stages of stock market grief for Fallen Angel growth stocks like IBM. The stages: disappointment, hate and, finally, neglect, produce the kind of return record IBM has delivered these past years. Neglect, the one place a stock never wants to land, is the point where price flatlines: the optimal place for investors to, at least, take a look.
One of my colleagues says at times like these, it is either the warning bell or the dinner bell. But which? We'd all be rich if we could, with certainty, identify stock price bottoms. After years of underperformance, IBM is either a dinosaur (as many have suggested) or finally turning a corner — admittedly at the glacial speed of a supertanker.
In the first positive comments I have read in years, Barron's quoted a money manager over the weekend who suggests IBM may have gotten its groove back. Maybe. Maybe not. Disagreement is what makes a market. Buyers purchase shares from eager sellers. But the argument for IBM is easier to make with the stock trading at a price-to-earnings ratio of 10 times next year's earnings—a level more than 40 percent cheaper than the S&P 500 and a dividend yield of 2.7 percent, well above the yield on the 10-year treasury.
Let's watch this one together. We'll learn a great deal in the stock market's real-time test lab about dinner bells and warning bells.
Nancy Tengler spent two decades as a professional investor. She is an author, financial-news commentator and university professor. Reach Tengler at nancy.tengler@cox.net.
