The Facts Are In — IBM Succeeded Where Investors Thought It Would Fail


If you’ve been around long enough to do so, take a few seconds now to think back over the decades of your life. There were likely a lot of wonderful high points to recall, but also some terrible lows. That’s just how life works. In many cases, you have to get through the lows to experience the highs. Often, doing so involves some kind of personal change.

The same is true of companies, which are just organizations made up of people. International Business Machines (IBM -0.55%) is one such organization with decades to look back on and it recently proved (not for the first time) that it has what it takes to get through difficult periods so it can enjoy the (financial) benefits of successful change. Here’s why this matters for IBM, and for all of the other companies you own.

The Living Company

Arie de Geus worked as an executive for integrated energy giant Shell from 1951 to 1980, effectively helping to create the company’s long-term industry forecasts. At one point while working for Shell, however, he was asked to consider what attributes a company needed to ensure long-term survival. That doesn’t mean the 20 or 30 years that a typical company exists. That’s a drop in the bucket. Arie de Geus looked at companies that had existed in some form for 100 years or more.

A pair of sneaker with arrows in front of them indicating options or alternatives choices.

Image source: Getty Images.

He eventually wrote a book about his findings titled The Living Company: Habits for Survival in a Turbulent Business Environment. Without getting into too much detail, what de Geus found was that companies are, as noted in my introduction, groups of humans all working toward a goal. Companies that manage to survive for centuries tend to have a culture that is focused on company preservation over short-term earnings growth. In other words, companies that are willing to endure near-term pain so that they can change and adapt to the world around them tend to figure out a way to keep going.

This may sound simple, but it requires a particular workplace culture. And that culture has to be fostered year in and year out. IBM has just proven (again) that it has such a culture, even though Wall Street didn’t seem to believe it could change — despite historical evidence that it has been able to do just that several times.

IBM proves investors wrong

IBM traces its history back to 1911. At its founding, it produced things like scales and clocks and eventually punch-card tabulating systems. As computers came on the scene to compete with its punch-card devices, the company shifted gears and started to produce the then-new computing devices. Eventually, however, making computers wasn’t a great business either, and the company shifted more toward technology services, helping companies integrate technology into their businesses. Essentially, the company transitioned with the world around it. These were not simple changes; they required years of effort and a commitment to remaining relevant, in a business sense.

That very basic history brings the IBM story up to the point where Ginni Rometty was brought on as CEO. Rometty’s tenure was not a particularly profitable one for investors, with the stock down around 30% over the span. And to be fair, she got IBM into a number of businesses lines that have since been exited in whole or in part, including healthcare AI and buying The Weather Channel.

IBM Chart

IBM data by YCharts

But it would be short-sighted to think that Rometty hurt IBM, as investors clearly believed given the stock price decline. She sold off businesses that were no longer desirable to be in and added new businesses that were more attractive, including being an early adopter of AI, the purchase of Red Hat, and continued investment in quantum computing. Yes, there were missteps, but every CEO makes some mistakes. Overall, she set the foundation for her successor, Arvind Krishna.

IBM Chart

IBM data by YCharts

Krishna exited more business segments and zeroed in on AI, cloud, and quantum computing. And with the restructuring of the company behind it (with much of the heavy lifting done by Rometty), financial results have started to turn higher now that IBM is refocused around higher-margin businesses with longer growth runways. As the chart above shows, trailing revenue and earnings appear to finally be on a sustainable march higher. Investors, meanwhile, have come back, rewarding IBM for what appears to be yet another successful business transition.

Change is hard, but some companies excel at it

IBM’s transition toward cloud, AI, and quantum computing wasn’t any easier than its last business overhauls. Businesses were closed down or sold, people lost their jobs, and Wall Street doubted that the company could regain anything close to its former glory. But the company’s recent financial results, including an 8% year-over-year increase in its consulting backlog, hints that 2024 could be another solid year for this technology giant.

Although IBM stock isn’t as attractively priced as it was when the business turnaround was still in progress, it is the type of stock that a dividend investor can buy and hold for years. No, it won’t always be at the top of its game, but history suggests that this “living company” knows what it takes to survive and thrive over the long term. Owning companies like that helps you build generational wealth. There are more of them out there than you might think, you just have to know what you are looking for. IBM is a good template for the search.



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