There are two important lessons to be learned from the earnings report that IBM (NYSE: IBM) released this week. The company is still making a lot of money, and it is struggling to maintain revenues.
The grand old name in American computers is facing a serious revenue decline; that shows no sign of ending. IBM reported revenues of $96.06 billion in September 2014 $92.79 billion in December 2014; that fell to $90.15 billion in March 2015, $86.91 billion in June 2015, $83.8 billion September 2015, $81.74 billion in December 2015, $80.84 billion in March 2016 and $80.31 billion on September 30, 2016.
By my calculations IBM’s revenues have declined by $15.85 billion in just two years. That calls the company’s business model and prospects of long term survival into serious question. Investors looking for a long-term buy and hold play should think twice about this stock.
IBM is still making a Lot of Money
Despite the revenue decline, IBM is still making a lot of money. It reported $11.83 billion in net income and a free cash flow of $3.533 billion on September 30, 2016.
The company also had a lot of float on the same day including:
- $9.968 billion in cash and short-term investments.
- $115.61 billion in assets.
- $18.58 billion in cash from operations.
This proves that IBM is a cash rich company, although its income has become very uncertain in recent years. IBM reported $14.21 billion in net income in September 2015. Its net income is $2.38 billion lower than last year.
The income figures show us that IBM is going to have a struggle maintaining the performance of past years. The 14.84% profit margin is not translating into the kind of income the company once had.
IBM is still a Great Income Stock
IBM is still a great income stock despite the revenue and growth declines. Investors receive a tremendous 78.66% return on equity on September 30, 2016.
Shareholders were also rewarded with a very nice dividend yield of 3.60%, on October 21, 2016. That was higher than the 3.41% the company reported on October 20, 2016.
The yield translated into a very healthy dividend of $1.40 a share last paid out on September 10, 2016. That dividend is 10¢ more than last year when investors received $1.30 a share and 30¢ more than in 2014 when IBM paid a $1.10 dividend.
That makes IBM a really good income and dividend investment with a dubious future. My take on IBM is that it will pay out for a few years, but its income and revenue are unstainable at present rates.
IBM is a good stock to keep if you own it right now but I would not pay the $150.19 a share it was trading at on October 21, 2016. That price is much too high given the revenue and income declines at IBM.
For those looking for a long-term buy and hold play that offers a good dividend. There are better and cheaper tech stocks out there; such as Apple (NASDAQ: AAPL) and Microsoft (NYSE: MSFT).
Tech Revenues Maybe Unsustainable
The most important lesson we can learn from IBM’s earnings is one that a lot of investors probably won’t like to hear; revenues at tech companies might be unsustainable. Disturbingly there is evidence at other companies to prove this thesis.
For example: Apple’s revenues in June 2016 were $14.7 billion lower than in December 2015. During that period the device giant’s revenues fell from $234.99 billion to $220.29 billion. Microsoft’s revenues fell by $2.76 billion during the same period, dropping from $88.08 billion to $85.32 billion.
Whether these companies’ revenue will stabilize at some point or keep falling is unknown. There is one possibility that every tech investor needs to consider, Big Tech may no longer be the steady revenue and income generator we thought it was.
We need to keep a careful watch on these tech giants, because they might stop paying out at the rate they have been if revenues keep dropping. Bargain hunters should also keep careful watch because share prices at tech legends like IBM, Apple and Microsoft might drop to new lows if the revenue decline continues.
IBM might have a future as a value investment rather than an overpriced income stock.