Blue chip stocks are generally associated with quality.
They may not be the most exciting stocks to buy, but their strong business models and consistent dividends make them very rewarding to own over the long-term.
For these purposes, the term ‘blue chip’ refers to stocks that have paid a dividend for at least 100 years, and also have at least a 3% dividend yield.
International Business Machines (IBM) is on the list.
While IBM is struggling through a difficult and prolonged turnaround, it continues to enjoy a strong reputation in its industry, and a highly profitable business model.
If the company’s turnaround is successful, it could generate strong returns. The stock is cheap, and offers a 4% dividend yield.
Plus, IBM has increased its dividend for 22 years in a row. It is a Dividend Achiever, which have raised their dividends for 10+ consecutive years.
This article will discuss why IBM is still a blue-chip stock.
Business Overview
IBM’s stock price has under-performed for an extended period. The share price is lower today than it was five years ago.
The reason for this is because IBM’s revenue has declined for 21 quarters in a row.
On July 18th, IBM reported fiscal second-quarter results. Revenue fell 4.7% year over year. Earnings-per-share declined 5% year over year.
However, IBM’s operating earnings-per-share, which excludes non-recurring costs such as restructuring expenses, increased 1% to $2.97.
Conditions are tough for IBM, for a number of reasons. First, the company is undergoing a huge business transformation.
IBM is still weighed down by older, slowing legacy businesses. An example of this is the Systems segment, which is still heavily reliant on hardware.
Source: Q2 Earnings Presentation, page 9
This is one of IBM’s worst-performing segments. Revenue declined 10% last quarter, as hardware revenue fell 10% year over year.
In response, IBM has made divestments across its legacy portfolio over the past several years.
