IBM (NYSE: IBM) is a perfect example of a well-respected company undergoing what many hope is a temporary rough patch. Its shares recently hit a two-year low, pushing its dividend yield up to 5 percent. The news arrived less than two weeks after a mixed third-quarter report.
The company is acquiring enterprise software provider Red Hat to strengthen its cloud computing business, one of the key “strategic imperatives” (cloud, analytics, mobile, security and social) that Big Blue is trying to grow to offset the weakness of its legacy businesses.
IBM’s push into cloud computing, though tardy, is beginning to pay off. On a trailing-12-month basis, cloud revenue totaled $19 billion in the third quarter, up 20 percent year over year. More importantly, cloud revenue now comprises about a quarter of all revenue at IBM.
Meanwhile, IBM looks to be on the leading edge of the blockchain revolution. Blockchain is a distributed way of tracking data that may have applications in a wide variety of fields, including finance. IBM is already testing its proprietary blockchain technology with a dozen banks in Southeast Asia, and it is developing blockchain-based shipping solutions, too. IBM’s future isn’t clearly golden, but patient believers can enjoy significant dividend income while waiting.
Ask the Fool
Q: I saw that General Electric just cut its dividend. What’s going on? – G.L., Norwich, Connecticut
A: General Electric has been struggling in recent years; it was even removed from the Dow Jones Industrial Average, where it had held a position ever since the index was created more than a century ago. It sliced its dividend in half last year and has now slashed it by 92 percent, to just a penny – presumably to avoid interrupting its 119-year dividend-paying streak.
The dividend cut is part of a plan to strengthen GE’s balance sheet. The company also aims to split its GE Power unit into two pieces – and to spin off its GE Healthcare business, which should command a steeper valuation.
Its recent third-quarter earnings report featured plunging earnings, adding to many investors’ concern. But GE still posted more than $1 billion in free cash flow for the quarter, and its aviation segment has a massive backlog because of rising global demand for air travel.
All is not lost for GE investors, but a turnaround will take time. In the meantime, the stock is a great reminder that well-respected companies can fall on tough times, and dividends don’t always grow.
Q: What are “government securities”? – R.T., Kenosha, Wisconsin
A: They’re bonds that a government sells in order to raise money. In the U.S., they include Treasury bills (maturing in a year or less), notes (maturing in one to 10 years) and bonds (maturing in more than 10 years). As they’re backed by our government, they’re viewed as ultrasafe, with little risk of default – which is why they can offer relatively low interest rates. You can buy or sell Treasuries via many brokerages, or at TreasuryDirect.gov.
My dumbest investment
My dumbest investment would have to be Energous Corp. The choice of the company wasn’t necessarily dumb – the dumb thing was that it was a cocktail party kind of tip into which I sank 90 percent of my cash on hand, buying at $21.73 a share.
I managed to sell 10 percent of my holding when it bounced back close to the stock price at which I purchased it. I used that money to buy some stocks recommended by The Motley Fool. Live and learn. – E.M., online
The Fool responds: You’re right that cocktail party tips can be risky, in part because you typically know little about how savvy and successful an investor the person offering the tip is. You don’t know if they’ve sunk any of their own money into the stock, either. Still, a tip might work out well – as long as you do your due diligence, studying the company closely and assessing its attractiveness as a portfolio candidate.
Energous has definitely tumbled from where it was early in the year, but that doesn’t mean it’s a bad long-term investment. Remember that the best stocks will generally reward you well over many years, despite various ups and downs. Energous bulls are optimistic about the company’s technology, which enables wireless charging at a distance, while bears note that Energous is still young and small – and not yet profitable.
Local journalism is essential.
Give directly to The Spokesman-Review's Northwest Passages community forums series -- which helps to offset the costs of several reporter and editor positions at the newspaper -- by using the easy options below. Gifts processed in this system are not tax deductible, but are predominately used to help meet the local financial requirements needed to receive national matching-grant funds.
Subscribe to the Coronavirus newsletter
Get the day’s latest Coronavirus news delivered to your inbox by subscribing to our newsletter.