Wealthy Nations Daily Update - IBM

“Nobody ever got fired for buying IBM”, or did they?!

Yesterday marked the 100 year anniversary since Computing-Tabulating-Recording Co., now commonly known as IBM, was listed on the New York Stock Exchange (NYSE). The initial listing price was $47, and IBM calculate that had you invested in a share back then, you would currently own almost 12,000 shares valued at USD 1.6m, so a gain of 3.4 million percent; or an impressive 11% annualised return (and this excluded dividends).

Although it was considered one of the more “standard” and “safe” stock bets, IBM shares have suffered of late. Slow to migrate away from the static PC market, IBM is only just moving into cloud computing, something which competitors such as Microsoft have somewhat already established. IBM’s current market cap, at USD 131bn is now dwarfed by Microsoft's USD 429bn.

Since IBM listed on the Dow Jones Index, back in 1979, the stock is up 1,700 percent, sounds huge, but the Dow Jones Index has rallied 6,000 percent over the same period. Since peaking at $215.8 in early 2013 the share price has fallen over 37%. The top three holders of the stock collectively own around 20% of the company, with almost 9% held by Warren Buffet, via Berkshire Hathaway Inc. Reports suggest that this one holding has lost Buffet USD 2bn; but he said that Berkshire “has no intention of disposing of our investment in IBM commonstock.”

From a bond perspective, we have never held IBM. Rated Aa3, we calculate that the 3.625% coupon bond maturing in 2024 has an expected return of 5.8% and has a 1.8 credit notch cushion. If we consider the Alibaba 3.6% 2024 issue, although rated one notch lower at A1, the bond returns an expected 11.4% and is roughly 3.2 credit notches cheap; so a far more attractive risk-adjusted return.