Computing veteran IBM (NYSE: IBM) generated $11.5 billion of free cash flow over the past four quarters. The company turned around and poured $5.8 billion of that bounty straight into shareholders’ pockets through dividend payouts.
That happened in a year in which Big Blue spent $34 billion on an acquisition. A less stockholder-friendly company might have paused its dividend policy in times like these, but not IBM. Instead, the company settled for symbolic dividend boosts of 3.2% in 2019 and 0.6% in 2020. (Its dividend yield was recently a hefty 5.1%.)
IBM is committed to rewarding shareholders with dividends. Its payout has grown by 715% over the past 15 years.
IBM’s recent big acquisition was Red Hat, an open-source software specialist, which it took on debt to buy.
Red Hat was growing at a solid double-digit rate prior to being bought, and its market share in the paid enterprise operating system market was recently second only to Microsoft’s. Its OpenShift cloud platform is a market leader.
IBM does have a lot of debt, but it’s a strong cash machine, with great long-term growth opportunities in the cloud computing, blockchain, data security and artificial intelligence markets. Patient believers in the company can also enjoy meaningful income from its dividend.
Ask the Fool
Q: I keep reading about Moderna and other companies working on promising COVID-19 vaccines. Is it worth investing in them? – E.P., Cleveland
A: Shares of Moderna and other vaccine-related companies have soared in recent months, some more than doubling or tripling in value. That means that expectations of successful vaccines are already baked into their prices. Some or all may continue to rise, but that’s far from guaranteed, since much uncertainty remains.
For example, which companies will end up with successful vaccines? Which vaccines will be most widely distributed? Which ones will generate the most profit for their makers? If you’re thinking about investing in one of these companies, you should look beyond vaccines alone.
Consider how much cash and debt they have – can they stay afloat a long time? Are they generating profits now, and are those likely to grow? Do they have a pipeline of other promising treatments in development, and how close to getting approved are those? Remember that if any vaccine being developed fails, its company’s stock is likely to fall, possibly sharply.
Vaccine makers can be risky investments. Digging into other health care stocks could turn up other exciting portfolio candidates that are more undervalued.
Q: What good financial planning books do you recommend? – C.W., Cerritos, California
A: Here are a few: “Get a Financial Life: Personal Finance in Your Twenties and Thirties” by Beth Kobliner (Simon & Schuster, $17); “Managing Your Money All-In-One For Dummies” (For Dummies, $30) and “Your Complete Guide to a Successful and Secure Retirement” by Larry Swedroe and Kevin Grogan (Harriman House, $19).
You might also want to consult a financial adviser.
My dumbest investment
My dumbest investment was buying a house at the peak of the real estate bubble in California in 2006. I learned that if the price is too high, it’s better to wait. – D.T., online
The Fool responds: Ouch. That’s a good reminder that when you’re in the market for a new home, it’s smart to consider how inflated home values may be. Just as stocks rise and fall in value, so do homes – though they often do so more slowly, so it can be harder to notice.
It’s best not to think of your home as an investment, because when it comes to building wealth, real estate generally isn’t your best bet. According to the Case-Shiller U.S. National Home Price Index, home values have grown by an annual average of about 3.5% over the past 30 years. Yes, some home values in some places will appreciate more robustly, but many others will grow more slowly. Also, even if your home surges in value, you can’t put that value in your pocket unless you sell the home or borrow against it.
Try not to overpay for a home, especially if you may not stay in it for a long time. If home values drop because of a recession, a wide-scale financial crisis or simply a bubble bursting, you don’t want to end up having to sell for less than you paid.
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