IBM and SO

By Malcolm Berko

December 9, 2015 5 min read

Dear Mr. Berko: Two years ago, I bought 300 shares of IBM at $211; it's trading at $139 now, and I'm $21,600 behind the eight ball. What do you think? Should I hold or sell? And what do you think of Southern Co. now that it has bought AGL Resources? I own 1,350 shares, which I bought in 2001 at $28. — JL, Jonesboro, Ark.

Dear JL: IBM was founded in 1910 as Computing-Tabulating-Recording Co. It manufactured and sold commercial scales, industrial time recorders, meat and cheese slicers, tabulators and punch cards. In 1924, Thomas Watson Sr. changed its name to International Business Machines (IBM-$139). Fondly called Big Blue, IBM began to lose its growth cachet about 17 years ago, and the company's legacy operations haven't fared well during the past 15 years. Virginia Rometty, who became CEO in 2012, has been engaged in a failed multiyear effort to have IBM reinvent itself. "But tell me," said professor O. Leo Leahy, Ph.D., from Kokomo, "how does one 'reinvent' an $83 billion-revenue company?" Perhaps Tim Cook should have remained at IBM.

During the 1970s, '80s and '90s, IBM traded authoritatively between 25 and 30 times earnings; however, in the past 12 years, the price-earnings ratio has fallen by half. For at least a decade, previous management has successfully resisted the urge to grow its revenues. Instead, management tried massive layoffs, lowered research spending, cut sales commissions and reduced employee benefits before moving half its workforce overseas where labor costs are lower. It helped, but just a little bit. Then management eliminated most of its non-core products, culled its heretofore bulletproof executive suite and instituted multibillion-dollar share buybacks. As a result, IBM's dividend in the past dozen years has increased eightfold as revenues have ignominiously declined. The dividend, now $5.20 and yielding 3.7 percent, has increased every year since 1996. So IBM has become a dividend growth stock rather than a principal growth stock. Revenues of $83 billion this year are lower than those two decades ago, though net profit margins have zoomed to 17 percent from 9.1 percent in 1996. Today competitors are eating IBM's lunch, and Big Blue isn't the admired, classy and unstoppable behemoth it used to be. The revenue consensus for 2016 is $82.5 billion, and the dividend is likely to increase to $5.50 next year on improving net profit margins.

Unless IBM becomes a takeover candidate, it won't return to your $211 purchase price, which was 72 points ago. A friend of mine, corporate profiler Graciela Lupinsky, sourly notes that though Warren Buffett's Berkshire Hathaway owns 79 million shares, only two open-end mutual fund families think highly enough of IBM to own the stock. Graciela believes that IBM shares won't change much in the coming couple of years. She recommends selling your 300 shares now and registering a $21,600 loss. You could repurchase them 31 days later if you prefer dividend growth.

Southern Co. (SO-$45), which you bought 14 years ago, has increased its dividend by pennies every year since then. And because of its recent purchase of AGL Resources — a $4.5 billion-revenue, 6.5 million-customer natural gas utility — SO has become the second-largest utility in the U.S. I like SO, especially the business-friendly franchise area in which it operates. Business investment continues to move to the southeastern part of the country, which bodes well for the economy, as well as SO's revenues and income. I believe that the $12 billion buyout of AGL will prove to be an impressive success and that the synergy will add 55 to 70 basis points to SO's net profit margins. SO's current $2.17 dividend produces a swell 4.8 percent yield, and the dividend, aided by the AGL acquisition, should grow more robustly in the future than it has in the past. Wall Street believes that SO will earn $3.10 a share next year and then pay a $2.30 dividend, and based on today's share price, that would be a 5.2 percent yield. The AGL acquisition is expected to increase SO's prospects soundly enough that 14 of the Street's utility analysts believe that SO will move back up to the low $50s, where it traded earlier this year.

Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected] To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at

Photo credit: Jeffrey Zeldman

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