The Bullish and Bearish Case for IBM in 2015
The bull market is now almost six years old, and the 2014 gains were 7.5% in the Dow Jones Industrial Average (DJIA) and 11.4% in the S&P 500 Index. Those index performance metrics do not consider the dividends of individual stocks, but International Business Machines Corp. (NYSE: IBM) closed out 2014 at $160.44, for a loss of 12.4%.
24/7 Wall St has reviewed a bullish and bearish case for IBM and other DJIA components to see what lies ahead for 2015 and beyond. IBM was also the DJIA’s biggest loser of 2014. Is there a case to be made that IBM could become the magic turnaround Dow stock in 2015 or beyond?
IBM had a 2014 trading range of $150.50 to $199.21, and the consensus analyst price target of $168.67 as of the end of the year would imply upside of about 5.1% this year. Then there is the dividend yield of 2.7% to boot. One thing to consider here is that IBM spends more effort and capital buying back its stock than it does on the dividend for common holders. IBM’s 2014 performance on a raw unadjusted price basis, without considering the dividend, would have been -14.5%.
IBM had a market cap of $159 billion at the end of 2014, and it got off to a rough start in the first few trading days of 2015, with shares falling another $5 or so.
CEO Ginny Rometty unfortunately may be in a no-win position. Her strategy has been to stick with much of IBM’s prior policies. This includes cost cutting and spending money on share buybacks instead of making sensible bolt-on growth acquisitions. Sure, the cloud and Watson are there as initiatives. But IBM is still considered an old-school IT services giant.
Rometty is sticking with the endless stock buyback plan. IBM’s dividend yield of over 2.7% is an “accidentally high yield” due to the performance of IBM’s stock being so poor. Late in October came word that Rometty and her team approved another $5 billion for share buybacks, on top of some $1.4 billion that remained under a prior buyback plan, with a note that the company expects to request additional share repurchase authorization at the April 2015 board meeting. Hint on bad buybacks: IBM shares were almost $3 higher at the buyback announcement versus the end of 2014.
To show how poor things are here, 24/7 Wall St. recently covered IBM as the worst run of the large American behemoths for 2014. Still, value investors and bottom fishers are attracted to IBM because of a low valuation. It was featured as one of the five cheapest DJIA stocks as well, with an expected price-to-earnings ratio currently under 10. A report in late 2014 from Credit Suisse was very negative, effectively calling the stock a serious short sell with a price target of only $125 at the time. That is the lowest price target among all public Wall Street analysts.