Why IBM Is a Safe-Haven Stock
Over the last five trading days, the Dow Jones Industrial Average has fallen about 10%, but IBM's (IBM) share price has remained flat. The huge technology company's stock is one of the few that have avoided the carnage of the sell-off. What does IBM have that the balance of the U.S. stock market does not?
A look under the IBM hood could help investors identify the company's secret to stability, and that could prove useful as investors try to find other stable stocks where they can put their money as the markets maintain their sickening churn.
First off, it's clear that IBM has a lot of cash and receivables -- about $26 billion, according to its last quarterly report -- but so do many other tech firms. IBM's stash is not nearly as rich as the cash hordes of Cisco (CSCO), Microsoft (MSFT), or Apple (AAPL). IBM also has a reasonable dividend, which creates a 1.7% yield. But it's not the best: Microsoft's is better at 2.5%, and -- unlike the U.S. -- Microsoft has an AAA credit rating from Standard & Poor's, something only four American companies have.
The secret to IBM's value as a "safe haven" is the mix of its businesses, and the fact that virtually all of its business is done with large corporations and governments. Earnings at most of the world's huge multinationals have stayed strong, and they make up IBM's playing field.
A Closer Look
IBM sales in the last quarter were impressive, but not explosive. Revenue rose to $26.7 billion, in the second quarter, from $23.7 billion in the year-ago period. Net income grew to $3.7 billion, up from $3.4 billion in the second quarter of 2010.
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It was IBM's global tech-services operations -- including its tech-outsourcing business -- that drove this growth. As more and more companies turn to outside firms to run their IT operations, IBM, with its mix of hardware and software expertise, is bound to be at the top of the list. And much of this revenue is recurring. IBM's global tech business earned revenue of $10.2 billion in the second quarter, up 11% from the year earlier period. Gross margins in these businesses were 34%, on par with last year.
The other business that makes IBM so attractive is its software operations, the company's second largest division, which has stunning gross margins of 88%. It delivered revenue of $6.2 billion last quarter, which represents growth of 17.5% from the year-earlier period. Sales of software often involve licensing fees, another recurring form of revenue. Many companies look to IBM to help operate this software, creating another source of ongoing revenue.
IBM's advantage as an investment is not just that it has large revenue, but also that much of that revenue is recurring. IBM does not have to replace a large portion of its sales each quarter. Customers are "locked into" IBM's ability to manage the technology its sells. That makes the company's sales stable, a desirable attribute when the market -- and perhaps the economy -- are in trouble.
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