IBM Will Keep Beating the Market
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the chart above we compare the performance of IBM (NYSE: IBM) versus three very popular ETFs which track widely followed market indexes: S&P Depository Receipts (NYSEMKT: SPY) for the S&P 500, SPDR Dow Jones Industrial Average Trust (NYSEMKT: DIA) for the Dow Jones Index and PowerShares QQQ Trust (NASDAQ: QQQ) replicates the Nasdaq 100 Index.
The conclusion is quite clear; IBM has done much better than the three ETFs in the last five years. Not only in terms of total returns through the whole period, but IBM has also outperformed the indexes when looking at both the bear market which ended in the first quarter of 2009 and the nice recovery that came afterwards.
Over performing the indexes in different market scenarios is not something we usually see in companies of this size, and the comparison is especially interesting since we are measuring IBM against three benchmarks which are not easy to beat for a company like IBM. The S&P 500 and Dow Jones indexes hold IBM as one of their most important components, and the Nasdaq 100 has been doing quite well in the last years due to the positive influence of Apple among other high profile names.
After reviewing such an outstanding performance, investors could expect to see an above average growth rate in sales at IBM for the last years. But that´s not the case here: IBM has increased sales by nearly a 3% annually in the last 5 years, which is nothing to write home about. Earnings per share, on the other hand, have increased at a much better 16.4% annually during the same period.
One important aspect which has contributed to this difference is the increase in profit margins due to a bigger focus on software and services, which have much higher profit margins than hardware. We can see on the following chart from IBM´s investor’s presentation the evolution in profit margins and free cash flow that this change has produced over the years.
The company has also rewarded shareholders with solid dividend payments and share buybacks since 2000, we can read in the latest earnings report:
We have returned $133 billion to our shareholders since the beginning of 2000. At the end of 2011 our quarterly dividend per share was six times higher than 2000. During this period we reduced shares outstanding by one third. We expect to return $70 billion to shareholders in our 2015 Road Map period—$50 billion through share repurchases and $20 billion in dividends.
More profitable sales mean higher earnings and more cash flows available for shareholders, even if those sales are not growing very quickly.
Better yet, if emerging markets provide room for sales expansion, investors could enjoy a better picture for sales growth in the middle term. Growth markets are an increasing part of the company´s portfolio, since they are growing faster than the other regions. A higher proportion of sales coming from growth markets should provide some interesting tailwinds for overall level of sales in the following years.
IBM has done outstandingly well in the last years by focusing on the right business areas and rewarding investors with healthy cash flows. These two growth drivers don´t seem to be fading away anytime soon, and there could be better sales figures in the middle term thanks high growth geographies. IBM looks well positioned to keep outperforming the markets in the long term.
acardenal owns shares of IBM. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.