Top Picks 2016: IBM

01/25/2016 7:00 am EST


Vahan Janjigian

Editor, Bottom Line's Money Masters Stock Report

Our Top Pick for income-oriented investors in 2016 is one of the world’s best known and largest companies; the company has a long and glorious history, tracing its roots back to 1911, observes Vahan Janjigian, editor of Bottom Line's Money Masters Stock Report.

International Business Machines (IBM) is famous for its ability to innovate and reinvent itself. The company created a number of well known products that were technology leaders in their day.

These products include the Selectric Typewriter, the System/360 family of computers, personal computers, and the ThinkPad laptop computer.

It wasn’t that long ago when IBM was best known for making the world’s best computers. Making computers, however, is something the company no longer does.

Today’s IBM generates almost all of its revenues by providing business services, selling software, and arranging financing services for clients. 

In recent periods, the company has struggled with weaker revenues from the Software segment.

This is due in part to changes that allow clients to invest in software over longer periods of time, reducing the need for them to make large upfront outlays. In addition, the Global Services segment has struggled in part due to the stronger dollar. 

Investors have been punishing the stock primarily because revenues continue to decline. However, much of the decline can be explained by divested businesses and unfavorable currency effects. In fact, after adjusting for these items, revenues have actually been flat. 

Growth in future periods will depend on management's ability to successfully implement what it calls "strategic imperatives." These imperatives include cloud computing, data analytics, and engagement.

Revenues from these imperatives have been booming, but they are still too small to significantly impact the company's overall top line.

This should change within the next year or two. In the meantime, investors can enjoy the generous dividends while they wait for growth to return.

Given IBM's strong cash flows, management should have no trouble sustaining the dividends.

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