IBM has been one of my select holdings from the beginning. The reason I chose IBM is because of the very strict selection criteria I employ. I chart 10 years of analysts’ consensus of forward-looking earnings estimates for those that have been the very safest-dividend payers, and I look for the most smoothly upward-sloping EPS line that shows at least a tripling of those estimate figures, going back the past decade. IBM was clearly among those. 10 years ago that EPS figure was an estimate of $5.44 a share. As I write this, that estimate presently stands at $19.41 a share for this time next year.
I next chart the 10-year dividend payout picture, looking for the stair-step pattern of annual, double-digit, in-the-teens dividend payout pattern. IBM also met that criteria, as IBM was paying $.72 a share at the end of 2004. The current dividend payment is $4.40 a share, also better than a triple.
Finally, I look for a price pattern that reflects this earnings and dividend payout strength, which IBM possessed in the price chart up until a year and a half ago, when it peaked at almost $216 a share.
Big Blue had been among one of the very safest-dividend growers as early as October the 10th, but has since fallen from the top decile, into the second decile. With its poor revenue and earnings announcement yesterday, I fully expect forward-looking estimate numbers to be revised downward right away. This will result in a further eroding of its dividend safety ranking. Since I acquired all of my shares around low-risk market entry opportunities, my average cost per share is relatively low… but with yesterday’s 7.1% price cut, I have a 10.5% loss in my invested capital in IBM.
Fortunately for an investor like me, and hopefully, like you. I don’t have to do anything right away. My decision is that I would likely want to sell IBM, but just not now. I can afford to wait and to see what will further become of Blue and see if maybe the initial selling was an over-reaction. I can wait to see if the price might recover. I can even wait to see if they can improve their business model and turn their revenue and earnings prospects around. I can continue to receive their dividend, while I wait to see how things unfold. With a 10% loss, I am not in a position where I feel that I need to do anything just yet.
IBM has always been one of the very finest corporations in the entire world… a World-Dominator of a company. That dominance may actually be coming to an end, and I will need to sell. But, in the past, management has made alterations to its business model and turned their ship of state around, righting it for all new success and growth. The 10% loss to a 3% part of my portfolio is a 3 tenths of 1% loss. Just how much of a hit did I really take? Hardly any at all! This is also one of the beauties of being an investor.
I am going to wait and see. I am going to continue to audit and analyze my decision and my position in IBM. At some point, history being a guide, I suspect, and I expect, that I may want to sell off my holding in IBM… but, hopefully at a price that is at least 10% higher than it is right now, for a small profit, and continue to collect her dividends all along the way, for re-investment into some better idea, and I’ll report it as I do that, and state my reasons as to why.
Here’s to your successful investing!
Harold F Crowell