Warren Buffett’s Berkshire Hathaway Owns This IT Company, Should You?
Muhammad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What could have enticed a billionaire investor that eschewed tech stocks for years into owning a lion’s share of IBM, splashing over $10 billion on the transaction? Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) currently owns 5.83 percent of the shares outstanding of IBM. That figure represents the largest single shareholding in IBM! Legendary investor, Warren Buffett has the pedigree of buying stocks of companies with strong competitive strengths that manufacture products people use every day. Buffett also prefers companies that are fundamentally undervalued, but he had avoided investing in early stage tech companies for decades. There are new trends emerging in some tech companies that must have attracted Mr. Buffett’s attention:
IBM is a Cash Cow
IBM (NYSE: IBM) is a high-volume cash generating tech company in the same class as Microsoft (NASDAQ: MSFT) and Oracle (NASDAQ: ORCL). IBM provides technology services to businesses and has competitive strengths unmatched by peers in its line of business. That is one basic characteristic Mr. Buffett looks for before investing in any company. IBM’s logistical software is its major strength. The software links clients of business organizations with several hardware units and this alone improved the earnings of the company by $6.3 billion in 2011 from $5.5 billion in 2010. In the last five years, the free cash flow of IBM has consistently improved as shown below: 2007 – $11.5 billion, 2008 – $14.6 billion, 2009 – $17.3 billion, 2010 – $15.3 billion and 2011 – $15.7 billion. IBM distributes much of this to its shareholders, except where deductions are made for acquisitions.
Consistent Dividend Payouts
IBM has consistently raised its dividend payout each year for the past ten years. Without any contradiction, IBM remains the best tech stock on the scale of dividend payments. Apple is a fantastic growth tech stock but it can’t match IBM’s penchant for regular dividend increases, because the bulk of its incomes are earned overseas, and if it attempts to repatriate its huge cash stashed abroad, Apple stands to pay a higher tax rate of up to 30%.
Potentials for Future Growth
Mr. Buffett hopes to own IBM indefinitely simply because the stock ‘’fits all my principles’’ using the billionaire investor’s own words. Indeed, on the scale of price earnings ratio, IBM compares well with Microsoft and Oracle with 15.26, 14.83 and 15.67 values respectively. Looking at their earnings per share growth metrics for the past five years, Oracle and IBM lead the way with 19.28% and 16.60% while Microsoft lags behind with 7.01%. Looking at the three tech stocks using analysts’ expected earnings per share values for the next five years, Oracle and IBM are more promising with 12.27% and 10.08% while Microsoft comes behind with 8.87%. However, Microsoft leads on free cash flow with $24.6 billion for 2011 fiscal year, compared with IBM’s $15.7 billion, and Oracle’s $13.1 billion.
IBM regularly makes strategic acquisitions that enable it to continue to grow its earnings and profits, and also has gained entrance into some emerging and lucrative markets around the world, like the Asia-Pacific region, which is one of the world’s fastest growing markets. In 2011, revenues from Asia-Pacific helped IBM grow its total earnings by 23.64 percent, up from 19.74 percent in 2007.
IBM has grown from being a global leader in the designing and manufacturing of desktop computers to a giant tech company that provides critical technology services and business consulting to the world’s most renowned business organizations. IBM’s services help top companies to deliver their products and services at the most cost efficient levels. Though IBM is a global leader in the IT services industry, most value investors rarely notice its prime importance in this era of smartphones and iPads/iPods. IBM provides IT consulting services like software and cloud computing to the top companies in the Global 500.
Though more returns on your investment could be achieved if you were to buy tech stocks like Apple or Google, these tech stocks pose more risks than IBM. Besides, diversification is the rule if you are looking to have a balanced investment portfolio. I’m long on IBM and I recommend its stock to investors looking for steady income and growth.
Know What You Own
It's been a frustrating path for Microsoft investors, who've watched their company fail to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. In this brand new premium report on Microsoft Fool analysts explain that while the opportunity is huge, the challenges are many. Also provided are regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.
muhammadbazil owns shares of IBM. The Motley Fool owns shares of Google and Oracle. Motley Fool newsletter services recommend Google. 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.