April 28, 2013 in Business

Investors can’t overlook IBM’s longevity, diversity, strong returns

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Shares of IBM (NYSE: IBM) rarely trade at bargain levels, but it’s a great company trading at a reasonable valuation these days – with a 1.6 percent dividend yield, to boot. It’s also one of the most valuable brands in the world.

More than 100 years old, IBM is the original information-technology company, adept at adapting to changing times. It has morphed from a hardware company to one focused more on software and services, earning higher profit margins. Some see IBM primed to become a leader in cloud-computing-based IT services now, and CEO Ginni Rometty is also moving the company into mobile computing technology.

Its shareholders can’t complain, as the company’s stock has averaged returns of 9.5 percent annually over the past 30 years, and 16.5 percent over the past 20. It earns high marks for social and environmental responsibility, and provides energy- and water-management software solutions to other companies.

IBM isn’t perfect, though, as its long-term debt does top $20 billion. That’s not ideal, but it’s generating more than $15 billion in free cash flow annually. The company has been buying back lots of shares, too, thereby boosting the value of remaining shares. (The Motley Fool owns shares of IBM.)

Oops! Department: We recently said that Microsoft’s Windows 8 system is in the works. We should have said Windows Blue.

Ask the Fool

Q: What are the pros and cons of I Bonds? – P.M., Shenandoah, Iowa

A: I Bonds are savings bonds offered by the federal government, with inflation-adjusted interest payments. They feature limited risk (the U.S. government is known to be reliable), tax advantages, small investment amounts (as little as $25) and protection against inflation. Interest can even be taken tax-free if used for educational expenses.

On the downside, the bonds’ interest rates are low these days – at 1.76 percent recently and due for a semiannual adjustment on May 1. That beats most savings accounts or CDs, though.

You’ll also lose some moolah if you cash out early (within five years), and over the long haul, money tends to grow much faster in stocks than in bonds. Per data from the folks at FundX, stocks outperformed bonds in every 25-year period between 1925 and 2011, with stocks averaging an 11.4 percent annual return and bonds averaging 4.3 percent. Still, bonds remain a valuable way to diversify and strengthen a portfolio.

Q: How can I find out what Social Security benefits to expect in retirement? – T.N., Manteo, N.C.

A: The Social Security Administration (SSA) used to annually mail out a record of your earnings history and estimates of the benefits you may qualify for now or later. Those mailings have now ceased for folks under 60, but you can look up the information at ssa.gov/mystatement.

My dumbest investment

In 1968, during a lunch with three salesmen at an airport, we sat next to some Japanese men. They recommended investing in shares of Toyota. I bought 5,000 shares at a dollar apiece, and the stock soon began paying 5 percent dividends annually.

In the early 1980s, my Toyota investment had grown to $38,000, and I sold it and invested in some friends’ farmland in Arkansas. Well, due to mismanagement, I lost all that money in Arkansas. I’m not sure I really want to know, but I do wonder what I would have made leaving the money in Toyota. – A.J.M., Normal, Ill.

The Fool responds: You would definitely have been better off sticking with Toyota. Its stock has averaged annual gains of about 7 percent over the past 20 years. A key lesson here is the danger of putting too many of your eggs in one basket.


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