Is There Value In Coca-Cola and IBM After Big Respective Drops?

coldcokeI just wrote a post comparing the stock market to a roller coaster, and you can see that bear out with the way The Coca-Cola Company (KO) and International Business Machines Corp. (IBM) saw their respective stocks react after third quarter results that were, to varying degrees, disappointing.

I’m a shareholder in both companies, so you can bet that I was just as interested in anyone else in these reports. Perhaps even more interesting than the results themselves was the carnage that followed – KO was down just over 6% on Tuesday, while IBM has fallen by more than 10% over the last two days. Those are big numbers when we’re talking about two titans of their respective industries that both sport market caps north of $165 billion.

But what does all of this mean? Without some context, a stock dropping by 5% or 10% means nothing. After all, if a stock is overvalued by 20% and falls by 10% it’s still overvalued, right?

So let’s take a look at these two stocks. I’ll give a brief overview of their respective third quarter results, where the stocks are at now, and reasonable estimates of valuation.

International Business Machines Corp.

This one took me by surprise. IBM has long been suffering through revenue growth issues, which hasn’t really been a major problem for me. After all, you can take in all the revenue you want and still be an unprofitable and unsuccessful enterprise if you’re unable to convert that incoming revenue into some sort of profit. However, I don’t feel totally comfortable with the complete lack of top line growth either. You can only squeeze so much efficiency and margin out of the same top line dollar and there are only so many shares to buy back, so at some point the core business needs to grow.

But this most recent report spoke to profitability issues, which is new for IBM. However, let’s keep things in perspective here.

IBM has grown earnings from $4.94 in fiscal year 2004 to $14.94 in fiscal year 2013 (fiscal year ends December 31). That’s a compound annual growth rate of 13.08% over that time frame. So this is a company that usually generates pretty exceptional results. Now, earnings have grown rather briskly, even while revenue is pretty much flat over this period. And this is partially due to a pretty substantial share buyback policy – they’ve reduced the share count from 1.646 billion to 1.054 billion during this 10-year stretch.

However, if you’re all, “What have you done for me lately?” then IBM disappointed. 3Q EPS came in at $3.46, down 8% YOY. However, not only was profit down, but it was substantially below analysts’ estimates. S&P Capital IQ, for instance, was estimating $4.41. So this was a huge miss. They’re now guiding for $15.97 to $16.30 for FY 2014 earnings, which is well below consensus. Furthermore, IBM abandoned its well-known 2015 roadmap objective of $20 in operating EPS. The company is citing weak software sales, currency headwinds, and unprecedented change in the industry. However, keep in mind that hitting $16.00 in EPS would still be a 7% improvement over last fiscal year’s results.

What’s more, gross operating margin was down 40 basis points year-over-year, and revenue was down down 4% to $22.4 billion. I will discuss for a moment that the revenue drop is not surprising. As was noted by Martin Schroeter, SVP and CFO in the conference call:

In the near term, our revenue will be down, not surprising since the three divestitures this year represent about $7 billion of revenue with pretax losses of about $500 million. So clearly we’ll have improved margin profile.

He then noted:

These actions also free up our spend and capital to be reinvested to areas that will accelerate our transformation and these allow us to continue to provide very strong returns to our shareholders through dividends and share repurchases.

Gotta love that, right?

Perhaps the biggest news of all is that the company unloaded its semiconductor unit and paid a head-scratching $1.5 billion to do so, finding a buyer in Globalfoundries Inc. I’m not quite clear on why they had to pay to unload this business, but it has been losing money for the company. This is further action to increase margin and profits for the company, as it can be tough to move the revenue needle when we’re talking $100 billion per year in revenue. So IBM noted that they’ll get supply (when they need it) at market price, while allowing Global Foundries to run the business in perhaps a more profitable manner. It appears they basically unloaded a loser and moved on. Seems appropriate, though this move was surprising based on the terms.

One other note on this earnings report was that the company’s backlog fell by 7%. However, one fact people might be missing is that the backlog is still $128 billion.

For the future, the company is expecting to take on the challenges they face through a number of initiatives. First, there’s the aforementioned divestitures so that they can continue to focus on businesses that provide the highest margins. They also continue to aggressively grow their cloud offerings, and this side of the business is seeing big growth. Even though it’s a small part of the overall company, it’s grown by more than 50% year-to-date. They’re improving flexibility in the way customers buy their products and services and increasing automation in their data centers. So they’re basically still reshaping the business to be as competitive, profitable, and effective as possible. It appears to short-term pain for long-term gain.

Where does that leave the valuation? Well, shares are trading hands for a P/E ratio of 10.25 right now. That appears almost obscenely cheap for a blue chip company with 13% compound annual growth in earnings for a decade straight. Furthermore, this is a company with a 19-year streak of consecutive annual dividend raises, and over the last decade has increased the dividend by an annual rate of 19.4%. Moreover, shares yield 2.70% right now, which is the highest this stock has ever offered. And you get that kind of yield with a payout ratio of just 27.6%. These numbers are extremely impressive, in my view.

The third quarter was no doubt painful, but the recent share price reaction lopped about $16 billion off the market cap of the company. Seems a bit much to me. I valued the shares using a dividend discount model analysis with a 10% discount rate and an 8% long-term growth rate. That growth rate seems reasonable to me considering their historical production, and the fact that even through the worst year in a long while they’re still producing 7% annual growth. The DDM analysis gives me a fair value on shares of $237.60. I think it’s reasonable to assume shares are worth at least $200, which means the current share price gives you a ~20% margin of safety even on that.

I’m strongly considering adding to my IBM position here. Although I don’t plan for or want IBM to be a major position in my Freedom Fund, I think there’s value here and I have a little more room for IBM shares (it’s currently about 1% of my portfolio). This is my only tech holding, and that’s because of its long-term history of adapting, growing dividends, reducing the share count, and increasing earnings. However, I would like to see some growth in the core business at some point, as the lack of revenue growth is now apparently starting to spill over into the bottom line by slowing earnings growth.

The Coca-Cola Company (KO)

How much more blue chip does it get than Coke? If you’re a dividend growth investor, you’re already extremely familiar with this company and it stock. After all, they’ve been paying increasing dividends for the last 52 consecutive years. Not too shabby, right?

So what happened? Why is KO down 6%?

Let’s take a look.

I can tell you the company reported EPS of $0.48, which is a disappointment when compared to EPS of $0.54 for 3Q14. Revenue came in at $11.976 billion. Again, below what we saw last year. An 11% drop in earnings isn’t something I get real excited about, although a 6% drop in the company’s value for one off quarter seems to be an overreaction. The company is sticking to its long-term EPS target of annual growth in the high single digits, but does expect to now miss that target for 2014. They continue to cite currency headwinds and a challenging macro environment. It is interesting to note that KO’s third quarter was weaker than IBM’s results in some respects, yet its stock has not been hammered quite as hard.

However, I did find it promising that the company reported 1% volume growth, with still beverage growth particularly strong. Not only did case volume grow, but so did prices (also by 1%) to offset rising input costs.

The company discussed expanding productivity initiatives which should result in $3 billion in savings by 2019. This will supposedly be achieved through a variety of actions, most notably including refranchising the majority of company-owned bottling territories in North America by 2017, with the rest of the territories being complete no later than 2020.

In addition, the company remains committed to innovation like new sweeteners and its marketing platforms.

Overall, it was a rough quarter. But I’m honestly not concerned about Coca-Cola. Look, this is a company with 17 $1 billion brands. We’re talking the iconic Coca-Cola brand in addition to brands like Powerade, Dasani, Minute Maid, Simply, and Sprite. In addition, they made notable and sizable recent investments in Monster Beverage Corp. (MNST) and Keurig Green Mountain Inc. (GMCR). The former transaction gives them a 16.7% equity stake in the company and exposure to a fast-growing energy drink segment. The latter transaction gives them 16% equity and exposure to coffee, in addition to a unique partnership designed to bring Keurig Cold to homes where consumers have the potential convenience of preparing Coca-Cola’s iconic beverages at home.

I’ve discussed Coca-Cola’s ability to adapt to changing consumer tastes and trends as an advantage, due to its size and scale. And these transactions are evidence of that, in my view.

While this quarter was rough, let’s keep their long-term operational history in perspective. EPS grew from $1.00 to $1.90 from fiscal years 2004 to 2013 (FY ends December 31). That’s a compound annual growth rate of 7.39%. Meanwhile, revenue increased from $21.962 billion to $46.854 billion during this period, which is a CAGR of 8.78%. A dying business? I think not.

People have to drink fluids. So you have to like the odds that the world’s largest beverage company will be around and doing well a decade from now and beyond. And in many developing countries, water is scarce. Coca-Cola provides a safe, clean method of water delivery to billions of people. Sure, you could drink tap water for almost free in a developed country like we have here in the US, but I’m one of those crazy people that like drinking orange juice in the morning, a sports drink after a good workout, and the occasional can of Coke on the weekends with a slice of pizza. The simple things in life are the best.

So I touched on their ridiculous dividend growth record. Over the last decade, KO has increased its dividend at an annual rate of 9.8%. The stock now yields 3.0%, which is typically a marker for a good time to buy shares in this beverage giant. The payout ratio is a touch high, at 65.2%. And that’s probably due to the dividend growth exceeding earnings growth over the last 10 years. As such, I expect future dividend raises to be more or less in line with earnings growth, and the company is targeting high single digits for that.

So where does that leave us? Is Coca-Cola a great deal after the 6% drop? Well, KO shares sport a P/E ratio of 21.74 right now, which doesn’t exactly incite enthusiasm or thoughts of extreme value. Keep in mind KO’s five-year average P/E ratio is 18.3. I valued shares using a dividend discount model analysis with a 10% discount rate and a 7% long-term growth rate. This growth rate is slightly below their historical earnings growth rate, which will drive dividend growth. And it’s more or less in line with Coca-Cola’s own target. This gives me a fair value on shares of $43.51. So shares are reasonably valued here, but no steal. The 6% drop was probably warranted when you factor in fully priced shares and a weak quarter.

I don’t plan on adding to my KO position right now, and that’s probably just as much due to the fact that I already have a fairly sizable position in the company as it is the current valuation. However, I’m not opposed to buying shares here. It’s a world-class business trading at a fair or better price. I’ll have to assess capital availability and other opportunities in the market over the coming days and weeks.

Conclusion

Both of these companies are iconic blue chips and titans of their respective industries. Looking at one quarter of performance and then making long-term investment decisions based on that is, in my opinion, a poor strategy and extremely shortsighted. I tend to take one quarter and try to put it into context in the here and now while also keeping perspective via the overall long-term operational history. Consistently deteriorating fundamentals, on the other hand, where you have quarter after quarter of losses that eventually add up to years of poor performance is quite another beast. But you can see that’s not the case with either company.

IBM is by far the better value here, but also carries more risk. Technology changes fast, but so far IBM has had an ability to adapt for the most part over long periods of time. They’re shedding unprofitable businesses so as to concentrate on those businesses that offer better margins and higher growth potential. This creates some volatility in operational results over the short term, but one does hope that the business benefits over the long term. They sport innumerable patents, and have the platforms, people, and technology to succeed. It’s really up to management and the business to take advantage of their inherent advantages. I do remain concerned about the lack of revenue growth, however.

Coca-Cola shares are more or less fairly valued, with perhaps a slight margin of safety. However, one could do much worse than pay a roughly fair price for an excellent business. The company isn’t going anywhere, and is, in my opinion, a much lower risk stock than IBM. Hence, the higher valuation. They sport multiple billion-dollar brands, and recent investments appear attractive and strategic. Their marketing has always been extremely strong, and their core products are necessary to sustain human life. Furthermore, there’s a quality proposition at play there with strongly recognized brands. Their economic moat relies around brand and pricing power, global distribution, market share, and scale that is second to none.

Full Disclosure: Long IBM and KO.

What do you think? Is IBM a value here? Is KO fairly valued after the 6% drop? 

Thanks for reading.

Photo Credit: artur84/FreeDigitalPhotos.net

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185 Comments

  1. Thanks for the article. I’m not a shareholder of IBM, and most likely won’t be for the near term. However, I own a small position of KO that I’m actively adding too. During the drop today I decided to add some more. While I don’t see them as a steal, as you mentioned, it seemed like a fair deal over the long haul. I’ll keep adding around 40 and hoping it goes into the 30s and I’ll scoop up even more.

  2. Hi Jason

    It always amazes me that share prices can get hammered even though the company has increased their profit, or have had one bad quarter (half year in UK), but haven’t done quite as well as the analysts expected. While this may make sense if you are investing to make capital growth, if you are investing for dividends then a small miss on expectations or even a single period of profit fall doesn’t really matter if the dividend continues to increase and remains sustainable (this is probably why Coke didn’t fare as badly as IBM).

    This situation reinforces the fact that as a dividend investor, you need to ignore the daily “noise” and only react if something materially significant changes with a company.

    On the plus side though, as your previous post pointed out, falls can be a great time to buy. I look at my position, not as buying shares, but as buying dividends, and as the share price falls it is the same as a sale on the dividend price, so is a great time to load up. If we continue to see falls in the market, I will be taking some money from my “emergency” fund and buying great dividends for much less than they were selling for last month.

    Best Wishes
    FI UK

  3. Hi, very interresting read! Especially as I bought my first KO and MCD shares yesterday. As you point out, not a bargain but quite fair prices for excellent companies.

    Cheers

  4. I was looking forward to a good analysis, but i realize that again i was left disappointed. most of the ‘analysis’ was left talking about EPS and PE, and discussing the number of times dividends are raised in the past.

    This have always been my problem with people very much infatuated with dividend aristocrats, that i felt, lead them to not having good metrics to see early whether the company is having an issue.

    Talking about dividend increases and PE does not relate to the strength of ability to raise or even pay out decent dividends. Companies can take on on debts to pay for dividends. There wasn’t any mention of recurring free cash flow or base profits that satisfy the dividends payout.

    In the case of IBM, the problems is not just one quarter . if you are the value investor and dividend investor you would have size out that in the past few quarters the problems are obvious. There should be more look at the segmentals and tell a better story.

    “These actions also free up our spend and capital to be reinvested to areas that will accelerate our transformation and these allow us to continue to provide very strong returns to our shareholders through dividends and share repurchases.

    Gotta love that, right?”

    you just highlighted a management kool-aid that they like to put out to make them look strong. the problem is that from what i read in your post, there seem to be more evidence of optimism and trust in the companies and very little skeptism when it comes to questioning management’s guidance. If you understand the value investors you often quoted, they tend to have a higher quotion of pessmissim then optimism, and this prevents them from losing money.

    When i read your blog, i always get the feeling that you spread out so much that you really don’t know the companies beyond the superficial levels. And it is understandable consider you have roughly 40 businesses. how to know more about them if you are not doing full time and you are concentrating on your free lance writing career.

    Perhaps not knowing in detail is not really important to you. Fair enough. I am just feeling strange about quoting known figures and less on industry verticals.

    The line between value and junk is very close. Thats where value traps are, and i fear for you, because you don’t seem to have a system that focus on the busienss but just following the dividends.

  5. What happens if IBM keeps reducing share count year after year? Doesn’t Mr. Market run out of shares eventually?? 🙂

    It’s been turbulent to own classic icons like IBM, MCD and KO recently. However I’ve been adding all three despite weakening euro…that’s another factor for us European investors to consider…

    Keep up the good work! 🙂

  6. Agree with everything Kyith said. Also using a discount rate of 10% and a growth rate of 8% is highly optimistic. Add on another 2% growth and the model gives an infinite value. These drops are not just simply market movements as you talked about in your previous post but the companies are facing real issues. More critical analysis needs to be done without rose coloured glasses.

  7. DM,
    Nice breakdown of the situations these companies face. I’ve owned KO for a long time and this report changes nothing for me. IBM on the other hand, I don’t own but it is now tempting me. I need to do more research on it. I recently bought ACN because it’s much leaner and has a great balance sheet to go with dividend growth. I work in the industry, and encounter both companies, and ACN has a better reputation for service while IBM has big stable service contracts based on their hardware and software sales. It will be interesting to see if the stock rebounds quickly or spends some time down at these levels.
    -RBD

  8. I’d like to add to both although there’s more room for IBM in my portfolio than KO right now because I think KO isn’t at as good of a valuation compared to IBM. Both of these companies will be around for years to come but I think IBM faces a bit more headwinds due to their industry. But if you believe management is on the right track then now’s a great time to add some IBM. It doesn’t hurt that WB owns both!

  9. Jason:
    You make some excellent points about both IBM and KO. IBM’s yield has long been a show stopper for me. Simply too low. In the last few days though, it has attracted my attention. The price drop has pushed the yield up to a somewhat reasonable level that is far higher than normal for this stock. Nice div growth, low payout ratio. I’m giving a small purchase some serious consideration. I own no tech stocks. Perhaps it is time to spice up the mix just a little.

    As you state, KO is not a bargain, but I’m going with a fair value rating on this one. I’m an income investor and KO qualifies. I picked up another 80 shares yesterday after it dropped over 6%. Hopefully it will pay off down the road. It holds a large chunk in our portfolios now. Next step….find some more buys to level out the KO allocation.

    Steve

  10. As Warren Buffett says ” I would rather pay a fair price for a great company, than a great price for a fair company”

  11. You are speaking my mind, but in more detail and with better words.
    IBM is the best value in today’s market. I added at $166 and at $162. I will add more if it goes to around $157.

  12. IBM has bought back about 50 million shares of its own stock every year for the past few years. There are almost a billion shares of IBM outstanding right now so they are in no danger of “running out” of shares any time soon.

  13. Hoping to add IBM soon – a 2.7% yield is huge for them – their past 5 yr avg yield is 1.75% – no brainer for me

    As far as KO goes – whenever it reaches a 3% yield, it is a buy for me, which it is right now..

  14. I bought more KO yesterday. Stronger USD is making their overseas profits look bad. IBM has to tap the bond market to pay the dividend. IBM does not have a good CEO – a Ballmer clone – slow to reaction, does not want to change, does not listen to new ideas.

  15. Jason,
    You nailed it on these two solid companies. Although I favor AAPL over IBM and DPS over KO I agree with everything you said. Both should be core investments for the dividend investor. I plan on adding KO at these levels or lower. I am sure I will be thanking my younger self 30 years from now. Also have you heard of PEP coming out with craft soda? I like the whole idea.

  16. Hi DM,

    Great write-up and exactly what I needed. The first thing I thought after the drop was “This might be a great opportunity to start a position in these powerhouses”. After reading your vision, I will most certainly have a closer look at IBM. They might just be my next investment!

    Thanks!

    DW

  17. Regarding IBM, also remember that their first product from the recently announced enterprise partnership with Apple launches next month: http://www.pcworld.com/article/2836512/first-products-from-appleibm-deal-to-come-next-month.html

    I wouldn’t expect this to move the needle much in the near term. but this could be a very profitable move long term.

    I used to love tech stocks, but now they don’t sit well with me. The competition is fierce and you never know when a powerhouse will be knocked down. Think of how strong Blackberry and Nokia were just 5 years ago. MySpace anyone? Now, all of those companies are a shadow of their former selves. I think you are smart to avoid them.

    With that said, IBM has been able to successfully pivot at least a couple times in the past. I expect that this is just a minor speed bump in the story of IBM.

  18. Thank you for posting this evaluation. I saw IBM drop over the past few days and was wondering what reasonable people thought about it. I considered buying a few shares and this makes me consider even more. I’m interested to hear more later, if you decide to increase your holdings.

  19. Hi Jason, good analysis. I equal weight all my portfolio and have purchase limit on my stocks at $10K. I’ve already purchased $10K of IBM @ $180 and $10K of KO @ $40. Same for my holdings of JNJ, GIS, GE, KRFT, O, HCP, T etc I find this mechanical process is kind of liberating and avoids me from trading and constantly scanning the news – call it strategic ignorance. So, although IBM and KO look tempting I wont be purchasing additional stock due to my self inflicted rule.

  20. A few high level reasons I can think that IBM is PAYING GlobalFoundries to take them. I haven’t found the full details of the deal but below are a few things i could come up with. Disclosure im in the semiconductor industry but not IBM 🙂

    IBM want’s to keep their chip team around to support their existing product portfolio. They are big loss-leader inside the company because they don’t have the volume that the bigger guys (samsung, intel, GF, TSMC) have. In essence the chip team ‘primarily’ supply’s chip designs for IBM. Note i say primarily since there are other external customers that use their designs they just arent high enough volume to make up the difference in cost it takes to design and manufacture the chips.

    IBM will exclusively use GlobalFoundries for 22nm, 14nm, and 10nm semiconductors for the next 10 years. I have no doubt they negotiated preferential treatment at each of these nodes. Each node over time has various yield % (how many good chips you can get off a wafer) that determine how cost effective it is to make a design on a given node. The various semiconductor foundries basically lease out that factory space to customers on various terms based on a large number of factors.

    The terms of the deal state that GF will continue manufacturing Power processors for IBM for at least the next ten years and that the manufacturing centers in East Fishkill will remain open and fully staffed. This is important because breaking customer contracts can be hugely expensive. Additionally states frequently pay big $ in tax breaks to build these plants in the first place for high paying jobs. To just close the fab might cost them on their tax bill.

    It’s also important to note that because of how complex and specialized a fab is, it can actually be cheaper to PAY someone to take it. You see this all the time throughout the industry. I know it sounds counter-intuitive but these factories are some of the most complex industrial complexes in the world not your average donut factory where you can just strip out the machine and sell the building. There are also only so many people who actually want a fab (even worse if its an older fab).

    So in summary it sounds like an egregious number but when all the bean counters get done with it i’m quite sure this was a fair deal for both parties. To be perfectly honest even having been in the industry for a decade im leery to invest in the tech industry because it’s often very difficult to understand the full business model dynamics of these companies. The deeper i go into the rabbit hole the more i realize how much i don’t know.

  21. Being in the belly of the beast i’m VERY cautious when i invest in tech stocks. I limit them to a small segment of the portfolio.

  22. Definitely some interesting moves by Mr. Market. I agree with your assessment that IBM is a bigger risk/reward proposition right now, but am not sure that I’m ready to jump in just yet. While I think they are a great company, and one that has been on my watchlist for a while, I’m concerned with the squeeze a lemon technique they’ve perfected over the last decade. I think it is important, and likely a wise use of resources, to reduce the outstanding shares to increase earnings and protect a cash flow stream that isn’t growing. However, with that being said, there is only so much juice you can squeeze out of the lemon. While yes, there are tons of shares to still repurchase, at some point revenue and earnings growth must occur much more organically.

    At this point they are still in my watch list and I would pick up a small position at today’s price. However, until I see some stronger moves towards increasing revenues at this point, I won’t purchase a full position.

    Thanks for the comments and analysis. Certainly always interesting when big stalwarts hit the headlines for the “wrong” reasons.

  23. KO is trading around $40.40 today, so that’s a discount to your fair value estimate of about 7%. That seems pretty good to me!

  24. I thought IBM was a decent value in the 190’s so by that standard it is a bargain here.

    I would like to challenge your dividend valuation calculation for IBM. While it is true that in the short term (5 years), the company can manage 8% dividend raises due to the low coverage ratio, in the longer term the dividend increases will have to track EPS growth which in turn should link to revenue growth… this is the real problem with the model.

    Perhaps a two stage dividend growth model would be appropriate- say 8% dividend growth for 5-7 years then followed by 4-5% thereafter… This would lower the fair price for the shares to be closer to the current market price.

    IBM has made a big bet with pushing their Watson NLP (Natural Language Programming / AI) into a variety of fields (medical care, education, retail, etc). They spent $1B on this but there is no clear indication on how successful this will become commercially.

    There are a lot of unknowns with the revenue outlook of IBM- I am sure Ginny is under tremendous pressure.

    I am a fellow shareholder on this, and am somewhat concerned. However I won’t be selling as of yet.

    -Mike

  25. I think the MCD and KO results point toward a change in global health mindset. Don’t think the future is bright for these two. Who wants to admit they eat at McDonalds? For KO, who wants to drink calories rather than eat calories? Both are paying around 60% of their earnings, entering danger zone territory considering their payouts are growing fast than their EPS.

    IBM will power through in the long-term, as the technology world is not going away anytime soon. I think short-term there is still room to fall, but long-term nice add.

  26. Thanks Jason for your great blog, you inspire many and provide a great example of how important it is to have a clear plan/strategy and to stick to it no matter how moody Mr. Market gets. I have read it for some time now, and you have produced really good posts all the time. Keep on the excellent work!

    It seems that many of the giants (KO, IBM, MCD) are having difficulties at the moment. I use to own those two you analyzed here, and of course I’m still interested in those iconic brands. For me, it just seems that IBM is the only one, which really has value for value-oriented investors here but that you need to be cautious with it also. As you said, we should see some top-line growth at some point and it cannot be only about stock buybacks (although they are getting cheaper as the share goes down). Still, the valuation is not bad here.

    BUT, imagine if you would look only the numbers of KO and MCD without knowing the name of the company. What would your analysis be then? For me they both just look well overvalued. I think KO has a great brand and will have for years to come, but hey, we are not seeing any growth here either. For me a company (whichever is the name of it) without much growth would deserve a PE of 10 or so. If you add the high-quality of the company meaning that the EPS is quite secure as the business is very stable, then I could accept something like PE 15. That would mean a price tag of about 30$. If I cannot get it from there, I simply concentrate to somewhere else. If we could see some reasonable growth, then probably the current multiplies would be justifiable. Similarly with MCD. Its earnings are decreasing and the brand is getting worse as the people in the developed world are more and more conscious about what they eat (and this health-trend is also hitting KO as Dan said). It is so last season to go to McDonald’s. Still, the company has a PE of 17 or so. For me it’s clear that I will remain in the grandstand now. What do you think?

  27. When the execs exercise options, that creates more shares. If you read the SEC insider transactions they were exercising their options like crazy when the share price was over $190.

  28. As an investment ripe for this week, I agree with the idea that IBM looks like something worth getting into. I was considering it prior to the drop and feel that this just makes the deal better as a long term investor.

    KO is the first stock I ever bought and that was in 1983. If anyone thinks this drop is bad, they should have seen the fiasco when the new CEO took over after the untimely death of Roberto Goizueta. He was a very hard person to follow and the stock went from about $43 to about $30 after a year of bumbling and poor decisions. I held on and am glad I did as I now have a basis price around $2 so you can do the arithmetic on my actual dividend yield. I think its a company that long term will remake itself to fit the marketplace including health concerns.

    -Bill

  29. I very much agree with Dan. If you look into both reports, developed nations was their biggest downfall. People who’ve got access to information (i.e. Internet) are learning these are bad products. As emerging markets get educated they too will realize these are bad products.

    I think KO and MCD are huge companies and will need to re-invent themselves. Historically, they’ve never faced such headwinds. They’ve been able to build a brand through marketing. Now its really about educating your customer because they are so much more aware. They will have to spend heavily to do so as it is not easy to change large companies. I believe KO and MCD are at the same point at which IBM was more than 10 years ago. IBM missed the boat to invest in new areas but instead spent a decade buying back shares to keep EPS rising. In my opinion, I think IBM isn’t a great investment 10-20 years from now. And I really hope MCD and KO don’t do that for a whole decade!

    I am hoping KO and MCD turn themselves around. I am invested in those two and valuation looks about right and will not be adding on these dips. My post may have been pessimistic but I am optimistic about the future and changes the companies will bring. Cheers!

  30. It seems like IBM is priced as if earnings per share will never grow. When you sell at about 10 times earnings, any share repurchases that are made are highly accretive to EPS, as long as net income is at least maintained. So if they manage to repurchase 4% of shares outstanding each year, and pay a 3% dividend, an investor can generate a 7% total return pretty easily assuming to net income growth, and DPS & EPS grows at 4% (because of share buybacks). Sounds to me like there is some margin of safety today.

    As for KO, there are shifts in consumer preferences, but also it is very large. Yet, I would not write it off yet. Shares are a little pricey, and I would love them at $30 – $36/share.

  31. Mantra,

    What’s funny – is that my gut was thinking you were going to talk about IBM or add to your current position of them. I thought to myself – well crap – they are down $32 from their high and they produce still exception results at over $14/$15 per share in earnings. If they hit $16 per share in earnings this year – then awesome. I think divesting the one business line to remove expenses and an ailing business was a long term play for IBM to fulfill those back logs, to focus on the higher margin business and put more focus on cloud computing. As you have stated and I also analyzed myself on my recent post – their dividend growth rate is phenomenal. All I had to do was look at the 3 and 5 year growth rates and was sold, along with their absurdly low payout ratio paired with managements ability and focus to increase dividends. I appreciate you placing out the 10 year growth rate – loving that for sure. Further, as you also stated, the yield at over 2.7% was phenomenal as I’ve never seen it at this level before. I wish I would have initiated a little more than what i did, but I don’t want a big exposure to tech.

    Thanks again for breaking all of this down above DM – obviously cannot go wrong with Coke either. I just prefer Pepsi : ) as a stock, that is. Excited to see what you end up doing, as always! Talk soon.

    -Lanny

  32. Hi DM,
    I did add some position today of IBM, previously I had 5 shares and added 15 more today for a total of 20 shares.
    Thanks for the write up, I was expecting you would shed some light on these 2 stocks.
    I might not be able to reach the $100k goal this year with lot of things going, but happy where I am today close to $80k my portfolio total.
    Dividend Mom

  33. Agent,

    Great move there. Nothing wrong at all with buying KO here. Paying a fair price or slightly better for a very high-quality company is something I’m always interested in doing. I have a fair position in the company, so I’m not super excited about buying more right at this time, but I’m also not against it. Rough quarter, but great company.

    Thanks for dropping by!

    Cheers.

  34. FI UK,

    The stock market is a fickle beast, my friend.

    I look at stocks pretty much the same way. I’m buying yield, or dividends. So cheaper stocks simply allows me more dividend income on the same dollar, which means I’m that much closer to financial independence. Cheaper stocks is always great news for me. 🙂

    Best wishes!

  35. swedendividend,

    I hope you enjoyed it. 🙂

    And you’re absolutely right. I believe it’s always a good move to buy a great company at a fair or better price, and would always choose that over buying a poor company at a great price. The latter may offer more short-term profit if done just right, but the former is by far the better decision for long-term wealth building.

    Cheers!

  36. Kyith,

    You’ve been by here multiple times only to criticize my articles and analysis. If you feel that way then I don’t know why you bother to stop by. There are many other websites for you spend your time at. I suggest you go there. 🙂

    Cheers!

  37. Mr Bean,

    That’s an interesting scenario, isn’t it? At some point the company basically resides in the hands of but a few major shareholders, of which Berkshire is the largest. If those shareholders decide to sell back their shares as well to the company then it gets to the point where the company is going private. There are a few companies out there, like Wal-Mart, who are walking this path. Of course, I doubt we’ll actually see this. But less owners to split the profit between means everyone’s share of the pie is bigger. And I’m okay with that. 🙂

    Thanks for dropping by!

    Best regards.

  38. sceptical,

    You’re entitled to your opinion. However, my fair value calculation jives with S&P Capital IQ (mine is lower) and Morningstar (mine is now slightly higher after their recent revision). I don’t think it’s too far off base.

    Take care!

  39. RBD,

    I understand ACN is a great company as well. Although, they operate in a lot of different fields from what I understand. But many of their financial metrics are superior to IBM’s, especially revenue growth. But you’re paying for some of that via the valuation. So there is risk on both sides of the coin. However, I doubt you’ll be upset with your ACN purchase 10 years from now if their past is any indication.

    Thanks for dropping in!

    Best regards.

  40. JC,

    I’m in the same position. I have a bit more room for IBM than I do Coca-Cola. IBM is the better value, but also faces more risk. So it’s really two unique opportunities here.

    It’ll be interesting to see where IBM goes from here as far as restructuring for future growth. They got rid of some bad seeds, but they need to plant new seeds for the future. I haven’t heard a lot about what that looks like, which makes me hesitant to buy more. That being said, the stock is priced for mediocre growth.

    Take care!

  41. Steve,

    I hear you on IBM. I’m a bit younger than you, so the yield didn’t bother me quite as much. If I were older I probably would have never looked at it in the first place. But its yield has now pushed it into territory not seen before. I can’t think of any stocks right off the top of my head with a yield that high while simultaneously sporting a payout ratio that low. Really interesting.

    Nothing wrong at all with buying KO here. I’d be a bit more inclined myself if I didn’t already have a fair position in the company (for me and my needs). However, I’m also not ruling out a purchase in the very near future either. It’s one of my favorite companies, and I consider it a core holding for the portfolio.

    Keep up the great work!

    Cheers.

  42. AJ,

    Great minds think alike, right? 🙂

    I don’t know if it’s the best value in the market or not, but the margin of safety seems sizable. That being said, there is a fair amount of risk here. Execution risk is pretty large, in my view. And thus far management hasn’t really put together a good plan to right the ship. I think getting rid of $7 billion in business that’s losing money is a great decision. After all, who in their right mind would take on $7 billion worth of work (that’s taking away time and resources) if it’s only going to lose you money? However, they need to realign the business to make up for that and move forward.

    I’m extremely interested in adding to my position here only because the expectations are extremely low. The bar they have to clear is so low now that I can’t imagine them not clearing it in a big way. We’ll see!

    Cheers.

  43. Dave,

    Management has noted currency headwinds. I’d like to think these issues will even out over the long haul, and those headwinds are worth access to a global economy.

    I can’t say I totally disagree with you on Rometty. I’m no tech expert, and I’ve been open about that in the past. However, I haven’t really heard anything she’s said that really excited me or made me feel like she has total command of the situation. However, the stock is cheap and the business is still well-positioned. I don’t think they have unsolvable problems. We’ll see.

    Cheers!

  44. DM,

    I did hear about that move from Pepsi. I guess we’ll see how well it sells. However, I rarely see people grabbing the glass bottles at the grocery store that are made with real cane sugar. Probably a pricing issue. I know I also personally grab the cheapest packaging option (usually the cans) for that exact reason. Could be a nice niche product, though.

    The you of 30 years from now will almost certainly be thankful the you of today made the moves you’re currently making. Keep it up. 🙂

    Best wishes.

  45. Thanks for the observations and analysis. I’m not a shareholder of IBM don’t plan to initiate a position. I’m a shareholder of KO and plan to add to more shares to take advantage of the drop. KO is not going away anytime soon.

  46. DW,

    Thanks so much. Glad you enjoyed it and found some value in it.

    IBM is definitely not without risk. In fact, it’s fraught with it. However, I feel the valuation and yield compensates for that risk. Even a dividend growth rate that’s cut in half still means this stock is a good buy here. I’m interested in perhaps adding a bit to my own position, so I’m writing about what I truly believe in.

    I do hope, however, that management at some points starts to point us in the direction of concrete plans for improving the core business. There’s a lot of tech-speak on the conference call, but when hard numbers came up they were usually relating to shrinking the business. I’d like to hear more about, “The $7 billion was lost there, but we plan on increasing revenue by $5 billion here” kind of stuff. I didn’t really catch much of that.

    But the expectations are very low here.

    Thanks for stopping by!

    Take care.

  47. Mr. 1500,

    That Apple deal seems exciting, but I also don’t know if it’s really going to move the needle much. I guess we’ll have to see how it plays out. It seems like a good headline story, but I haven’t really read anything that excites me with big numbers.

    I hear you all the way on tech companies. I’m also extremely averse to investing in tech. IBM is my only pure play on tech, and it’s a very small part of the portfolio. If it wasn’t so successful at adapting over time and managing such a mind-boggling dividend growth record I wouldn’t have even touched it. I guess we’ll see what happens. Either way, I wouldn’t want a lot of exposure to this company or any others in tech.

    Thanks for stopping by!

    Best regards.

  48. Jamie V,

    No problem! I hope it provided some assistance to you. 🙂

    You’ll hear it here first if I decide to add. I’m 50/50 on it as of this moment. I’m thinking of pulling some cash out of the emergency fund and picking up an additional five shares. Nothing major either way.

    Cheers!

  49. Jon,

    Nothing wrong with that at all. Sounds like you’ve got a good system set up there that works for you. I say stick with it. 🙂

    All good companies as well. I continue to go back and forth on GIS, but I do like their recent acquisition of Annie’s.

    Take care.

  50. DM,

    Glad to see you tackled this topic, especially IBM. I’m not yet convinced to take a position as their streak of share buybacks to buoy P/E in light of no growth concerns me, but it shall remain on my radar until at least the next earnings report and I appreciate the analysis:)

    I would add Coke if it weren’t already at what I consider a full Phase 1 position, or had dropped down to the $38 range.

    Best,

    DWC

  51. Zol,

    Thanks for adding that! I really appreciate you giving me the rundown on all of that. I’ll be the first to admit that I take more of a 10,000 foot view on IBM and other tech companies because I’m not as comfortable maneuvering around their businesses as I am businesses in other areas of the economy.

    I know that IBM seemed to be joyous over the fact that they’re now fabless, so I’m quite sure both parties entered into this deal with a clear head. It was losing money for the business, so I’m just as glad as anyone to see them move out of it. That being said, the $1.5 billion came as a shock to me. However, your comment about the tax break makes a lot of sense to me. In addition, there might be additional costs to the fab that we might know about that Global required to take it off IBM’s hands. The whole deal was a bit light on details regarding the payment.

    I appreciate your hesitation in regards to investing in tech companies, even though you’re intimately familiar with the industry. I’m far from someone who’s that familiar, so my aversion is amplified. However, just looking at the financial aspects, IBM’s history, their position in the industry, their tech, know-how, and people I’d have to think that they can’t really exceed these lowered expectations. I guess we’ll see.

    Thanks again! 🙂

    Best wishes.

  52. W2R,

    Agreed. As I mentioned in the article, you can only squeeze so much efficiency and profit out of the same top line dollar. At some point you need to increase the core business, and with it revenue. The $7 billion hit to revenue was obviously smart if they were losing money, but I’d like to hear more about where the growth then comes from. It’s like they yanked dying trees from the yard, but haven’t really discussed how they’re planting seeds in those vacant spots. At least, not from what I’ve read.

    I totally understand your hesitation. Like you, I’m not really willing to go too heavy here either. IBM is about 1% of my portfolio right now, and I’m comfortable with that. If I were to add here, it might be another five shares or so. I think the potential rewards are compelling, but I’m always mindful of the risk. Capital preservation is always my #1 priority.

    Best regards!

  53. FerdiS,

    Well, that’s just a reasonable valuation estimate. I put a number on it, but it’s not meant to be an exact valuation down to the penny. I aim for a 10% margin of safety off my number so as to compensate for errors on my end or unforeseen changes in the business, but I think it’s roughly fair or better here. And paying a fair price or better for Coca-Cola is always a solid move, in my view. If I didn’t already have a fairly large (for me) position in the company I’d definitely be on it here.

    Cheers!

  54. Just seen the coke image and felt the need to drink something. Without reading the rest of the article (I’m doing it right now). That’s pure value.

    Thanks for your work DM

  55. Mike H,

    Dividend growth should mimic earnings growth over the long haul, although IBM’s extremely low payout ratio gives them a lot of latitude there. And that’s why you see a 10-year dividend growth rate that’s so much higher than the growth rate in underlying earnings.

    However, I think the model I used is accurate. The DDM analysis technically takes the number out to infinity, but I won’t be alive for infinity. I need to know what the stock is worth to me and what kind of valuation I’m looking at for a comfortable (10%) annual return. IBM could increase the dividend by 8% for a decade with no earnings growth and still have a reasonable payout ratio of 61%. I think it’s unreasonable and unrealistic to expect them to cut their dividend growth rate in half for the next 5-7 years and then cut it in half again from there on out. That’s just me, however. Furthermore, my fair value estimate jives with S&P Capital IQ (mine is actually more conservative) and jived quite well with Morningstar as of last Friday (they just lowered their number).

    But I agree with you that Ginny is under a lot of pressure. I’m usually one of the more passive investors out there in regards to management, compensation, expectations, etc. However, I haven’t really been “wowed” by Rometty at all. I hope they’ve got something in the works that makes its way through the pipeline, because the core business needs to grow at some point.

    I share your concerns. I think they need to improve the business, but the stock is priced for very low expectations here. At least, that’s my view on it.

    Thanks for dropping by and sharing!

    Cheers.

  56. Dan,

    I hear you there on MCD and KO. I’m actually less a fan of MCD right now than I am of KO. KO is fairly well diversified across a number of beverage lines, and their recent investments gives me a lot of confidence that they can maneuver when necessary. Furthermore, I see their core brands alive and well.

    MCD, on the other hand, has some issues. I don’t think their problems are insurmountable, but I also don’t know if they’re taking these issues seriously enough. I’d like to see them focus on three things: customer service, marketing, and menu. I think the first is a glaring issue. I’ve eaten at Chick-Fil-A on occasion, and the customer service compared to McDonald’s is night and day. The marketing is improving, and I like their initiatives in regards to opening up their plant and also communicating more directly with customers. I think they need to get the quality message out there, and then actually deliver with high-quality food. And the menu needs to be simplified, streamlined, and improved. The wing debacle was a good example of moving past their core competency.

    Thanks for stopping by. Appreciate you sharing. Can’t say I disagree with you that some of these titans need to change with the times. But I think Coca-Cola’s recent investments are just that – investing in high-growth areas while sticking to their core competency. MCD needs to make some changes as well.

    Cheers!

  57. Since I have positions in both companies the article was useful. It put the price action in perspective. I’m a new reader an already have found your writing useful.

  58. Isn’t this new health movement similar to the smoking industry? I think it was the 60’s or 70’s when information just started to come out that smoking is terrible for your health and the smoking companies started to freak out. Where are we now? People still smoke and smoke plenty. Phillip Morris is a staple in many Dividend Portfolios today. I work in a not so great area where I sometimes frequent a local McDonald’s and the place is always filled with low income people eating their breakfast and lunch. I go out to clubs and bars and there are plenty of young people who smoke. I think still both MCD and KO will do better than most in a recession.

    I do agree that both companies will probably have to add value to people who are looking to eat healthy but I don’t think really think that they will drastically change their core products.

  59. Trademark,

    Thanks so much for the kind words. Really appreciate it. I try to put out great content fairly regularly here, and I’m incredibly grateful to be in this position where I’m inspiring people on their journey to financial independence.

    I don’t disagree with you there in regards to KO and MCD. As I was pointing out in the previous comment, I think MCD has some glaring issues. Namely, I believe their customer service needs improvement, their menu needs to be simplified and streamlined so that they focus on what they do best, and I also believe their marketing needs to move away from hammering us over the head with the dollar menu. Let’s hear about quality. That’s what customers are after these days, me included.

    I valued KO based solely on their fundamentals to come up with the valuation. The question you have to ask yourself is if 7% growth is sustainable. Lowering the DDM analysis down to a 6% long-term growth rate brings us to a fair value on shares of $32.33. So you have to ask yourself if the company’s projections of EPS growth in the high single digits is accurate and achievable. If you don’t believe that, then this stock is simply not a good buy here. I think the last 10 years for the company is a reasonable baseline to work with for anticipating the next 10 years, so I went slightly under that to arrive at the 7% growth rate. The payout ratio is slightly high, so dividend growth will have to mimic earnings growth from here. I doubt we’ll be seeing 10% or 15% dividend raises from Coca-Cola anytime soon. That being said, this is a stable and defensive investment.

    Qualitatively, I think Coca-Cola is in much better condition than McDonald’s. They have a stable of great brands, and people are likely going to continue drinking them. Tap water has long been basically free, yet people continue to buy tea, orange juice, carbonated soft drinks, bottled water, etc. I see no reason that won’t continue over the next decade or two. And the recent investments in Monster and Green Mountain shows me that they’re willing to strike. I like that. Shows me management isn’t staid.

    MCD, however, is stumbling around. Thus, its valuation is below KO’s. You have to decide whether that 3.74% yield is worth it. However, neither brand is dying anytime soon. MCD is still expanding around the world, and you have to keep in mind there are certain issues plaguing them right now that aren’t necessarily brand related (tainted meat scandal, Russia, etc.).

    I will agree that neither stock is a great deal right now. I’d also prefer a larger margin of safety in both businesses, especially MCD. So that’s why you don’t see my jumping for joy and buying up either stock hand over fist right now.

    I hope that helps. 🙂

    Cheers.

  60. Bill,

    Man, I’d love to trade KO positions with you! If you’re ever up for it let me know. 🙂

    Great job holding on for the long haul. Too often we’re hammered with quarterly this weekly that. Holding on for years and years is uncommon, but the rewards are clear to see.

    Thanks for stopping by!

    Best wishes.

  61. Alex P,

    I hear you. I agree that there is some reinvention necessary. However, do you not feel that that’s what the major equity stakes in Monster and Green Mountain are? What about Honest Tea? Seems to me like Coca-Cola is solid at reinventing itself.

    Not too sure about MCD here. I think they have a customer perception issue. People perceive the company as offering low-quality food at a low price. They’re not helping that image. But I don’t think these issues are insurmountable. I laid out a number of initiatives I think the company can make in previous comments, so I won’t rehash that.

    We’ll see what happens with both of these companies. They’re positioned well in the marketplace and I think adapting to the times isn’t really all that difficult. That being said, I don’t think either stock is a steal considering the issues they’re currently facing.

    Thanks for sharing!

    Best wishes.

  62. These companies may announce for stock buyback soon. Something to hold onto in that case. Good luck.

  63. Kyith,

    You’re just a plain mean person. I’m a newbie dividend investor, and Jason has helped me understand dividend investing, payout ratios, P/E ratios, dividend yield %’s, etc. I really appreciate all the work that Jason puts into his blog, and his passion for investing is evident through this blog. There’s nothing like sitting at home bored during the weekend, and then seeing an informational/uplifting/encouraging post by Jason. This has quickly become one of my favorite blogs.

    My bet is that you’re just using this site to post a link to your blog, and you’re just trying to make yourself look better by trying to put someone down.

    Jason- Ignore the TROLLS.

  64. DGI,

    I agree. The expectations for IBM here are ridiculously low, and so its stock is very cheap. However, I do think the core business needs to grow. Getting rid of $7 billion worth of business that’s losing you money is obviously a smart choice, but what replaces that? I hope to see more news on where the company is going over the coming quarters, but in the meanwhile the stock is cheap. I agree with your numbers; however, I’d like to receive returns well in excess of 7%, which is why I want to see the company grow. I was modeling for 10% returns, but one could argue you’d want to aim even higher for the risk.

    I also agree with you on KO. I think it’s more or less fairly valued here, but one might want a larger margin of safety considering the headwinds.

    Thanks for dropping by!

    Best wishes.

  65. Lanny,

    IBM is definitely cheap here. We hear a lot about investors loving value, but then when the time comes and a stock is priced at a serious discount nobody wants it. Funny how that works out. Glad you decided to strike. I’m a little light on capital right now after making three stock purchases earlier in the month, but I might pull out some cash and add another five shares to IBM here. We’ll see. The only concern I have with the business is that I’m still not hearing a lot about growth in the core business. That being said, very little growth is really required to make this a reasonable and appealing long-term investment. A contraction in the business, however, would be a problem. So far, so good.

    Thanks for dropping in. Oh, and I like KO and PEP (products and stocks), which is why I own both. 🙂

    Cheers!

  66. DM,

    Sounds like you’re making some great progress over there. Very nice. Keep it up! 🙂

    Glad to see you adding to IBM here. It’s a bit frightening to enter the fire when everyone else is running away from it screaming their heads off, but that’s where some serious money can be made.

    Take care!

  67. Jason,
    As you I’m not in the least concerned about KO. It’s a great company with solid products and a wide moat. I’m convinced they will do just fine in the decades to come.
    IBM however is another case in my opinion. It’s very well possible they will be able to turn themselves around and will show again top and bottom line growth. But for me that is not guaranteed at all. If a top player in the industry loses the ball it’s very hard to get it back (think Nokia, think BlackBerry, think Intel, etc.). One way for them to go is cloud computing. That’s what IBM is trying. But cloud computing means lower margins, less customer loyalty (switching costs for customers are lower), more and agile competitors in that market. All this means their moat will narrow. Although IBM has an attractive dividend, strong share buy-backs and a valuation with a good margin of safety, I prefer to stay at the side-line for the moment. This might change when I see proof that the turnaround will become a success. Best wishes.

  68. DWC,

    No problem! I hope you found some value in it. It wasn’t a full analysis of either company obviously, but rather a quick rundown to give some perspective to the recent drops.

    Hope all is well!

    Cheers.

  69. George,

    Appreciate that. I’m glad you found some value in the article. That’s exactly why I write. 🙂

    This article wasn’t a full analysis of either company, as I generally perform one when discussing recent purchases. However, I wanted to provide some perspective and context to the recent price action. Always be mindful of the long term.

    Stay in touch.

    Cheers!

  70. Pete,

    I remember reading an article a while back (I think on Tim’s blog) discussing the disconnect between media and perception and these companies’ results. People talk about how people aren’t smoking Altria’s cigarettes anymore, drinking Coca-Cola, or eating at McDonald’s. Yet, all of them continue to see their bottom lines expand.

    Obviously, I’m not recommending any of these companies stay complacent. And I was discussing in a previous comment how Coca-Cola seems to get that and perhaps MCD does not right now. However, we’re talking about major global brands here. They’re not going away anytime soon. Will they be the kind of investments over the next 10-20 years as they were over the previous 20? I have no idea. But I also expect reasonable risk-adjusted returns, as both KO and MCD are relatively low-risk. That being said, I don’t think either stock is a steal here. But I’m happy to hold. 🙂

    Cheers!

  71. Young,

    I anticipate both companies will continue buying back their stock. IBM’s buyback plan in particular will be even more effective if the stock stays at this level for a while. 🙂

    Good luck to you as well!

    Take care.

  72. Joel,

    Appreciate the support very much. And I’m extremely glad you’ve found some value in the content here. I aim to inspire others to start down their own journey to financial independence via living below their means and investing in high-quality dividend growth stocks, so knowing that I had an impact on you means a lot to me. 🙂

    Kyith has posted here a few times now. And his comments are all the same. If he continues in the same manner I’ll probably have to kick him from the site because he offers no value. I don’t mind people disagreeing with me, and I’ve had lengthy discussions with others in regards to this very article. However, coming by and just saying, “Your stuff sucks” every few months offers nothing. So that’ll probably be the last time we see Kyith.

    Thanks again. Very much appreciated. 🙂

    Best regards.

  73. Jos,

    I hear you. IBM is a compelling value, but the risks are definitely there. I understand their cloud services are growing rapidly, but it’s still a small part of the overall business. I think getting rid of businesses that were losing them money to allow them to refocus their resources on those businesses that can grow and offer much better margins is smart. But there’s still a lot of execution risk there, and as you point out there have been many huge tech companies in the past that failed at this. Intel seems to be humming along for the most part, but Nokia and Blackberry are a shadow of their former selves. Although, Nokia and Blackberry are very different companies from IBM with very different operational records and dividend growth records. Still, I think your point is very valid.

    I can’t blame you for sticking on the sidelines here. I may end up buying another five shares here because the valuation is compelling, even with little growth to be had. However, I’ll also keep IBM to a relatively small portion of the portfolio due to the risks.

    Thanks for sharing!

    Cheers.

  74. Thanks for your thorough answer. Many excellent points there. I’m considering buying IBM and will follow how the things progress with KO and MCD.

    All the best.

  75. In the past I was only investing in my 401k, but soon decided to also start investing in individual stocks through a taxable account after reading some blogs. I like the easy access to funds, as I also plan on hopefully retiring at around 40-45. The funds in my 401k will remain there, growing until age 65+.

    Before running into your blog, I was primarily investing in a small cap etf within my taxable account. But there was always some skepticism on my part as to what the fund managers do with all the dividends(and what makes up the expense ratio), so I figured that I can start my own diversified portfolio with individual stocks. This will give me the peace of mind knowing where my dividends go. It took me some time to wrap my mind around the snowball effect article that you posted, but it makes perfect sense.

    I think my next challenge is to figure out how to pay for taxes on dividends. In April, do you usually sell some shares to pay your taxes for the previous year, or do you turn off the reinvesting feature throughout the year, set a portion aside for taxes, and manually invest the remaining dividends?

    Thanks,
    Joel

  76. My money is usually flying out of my pockets when I see prices drop the way IBM’s did. But this time, I’m hesitant.

    What really gets me most of all, among other things, is the financial engineering aspect – the fact that they have been and still resort to share buybacks to raise EPS. They’ve also taken on more debt, which was mostly used to fund the buybacks, I believe. In my opinion, it’s the wrong time and place for this sort of finagling.

    Even so, if I had a clear picture of where IBM was headed, I would be willing to take on the risk in exchange for the potential reward. Beyond getting rid of unprofitable units, though, I don’t know what management is planning to do.

    I’ll wait on the sidelines for this one. Who knows – it may turn out that, in hindsight, I was a big dummy and should’ve nabbed some shares while they were cheap.

    As for KO, I’m about halfway through a can at the moment. 🙂 I’ll be increasing my position if the price drops below $40 a share.

    Thanks for this article – it’s stirred up lots of very good discussions – and for responding to all of your readers’ comments, troll or no.

  77. Joel,

    Retiring between 40 and 45 is an excellent goal, my friend. That puts you far ahead of just about everyone else out there. That also frees up an incredible resource (your time) for anything and everything. 🙂

    As far as taxes go, I pay them out of my own free cash flow. Typically, I have less available capital to invest when a big tax bill comes around. And that’s because I’m diverting less capital to stocks because that capital is paying taxes. 2015 will be the same; however, this will be the first time I don’t have as much ample cash flow with which to direct in both places. And that’s simply because I make less money now. We’ll see how it goes, but I expect to have another hefty tax bill. And that’s not just because of dividends, but more so due to my online income. It’s grown faster than I expected, and so my quarterly estimated taxes won’t make up the difference. So I may not be able to buy any stocks at all next February or March. We’ll see.

    Cheers!

  78. Seraph,

    I hear you on the hesitation. However, be careful not to be the type of investor that claims they love a value only to be fearful of being greedy when others are being fearful. 🙂

    “They’ve also taken on more debt..”

    I’m glad you brought up the debt issue. I didn’t do a full analysis on either KO or IBM because that wasn’t the point of the article. However, IBM’s debt seems to confuse people. Specifically, I’ll address your point about taking on more debt. Plenty of major companies out there have been taking on more debt over the last 10 years. IBM is far from alone, and I’m confident far from the biggest offender. It makes sense to take on low-interest debt if you can leverage that into greater returns. For instance, you and I both own Pepsi. Their long-term debt has exploded from $2.3 billion to $24.4 billion over the last 10 years. Meanwhile, IBM has gone from $14.8 billion to $32.8 billion. One went up approximately tenfold, and the other about twofold. Pepsi has an interest coverage ratio of ~11. IBM sports an interest coverage ratio of ~49. So if either firm has a debt problem, it’s Pepsi.

    I tell you this not to sway your thinking on IBM or to criticize your comment. Rather, I encourage you to do some critical thinking. Instead of just reading articles on blogs or Seeking Alpha and assuming they have a debt issue, run through the numbers for yourself and do some real comparisons.

    Since you are interested in buying more KO – their long-term debt increases are much the same. Their long-term debt has increased from $1.1 billion to $33.1 billion over the last 10 years. That’s thirtyfold. It’s important to not just look at debt, but to look at that within the framework of overall operations. And as the numbers show, IBM has taken on less long-term debt over the last decade while employing higher returns than Coke.

    Keep these things in mind before assuming one firm has a debt issue, or is somehow any different from any other company.

    Cheers!

  79. Part of the problem with MCD is that for a long time people have said they wanted healthier fast food but when it came to what they actually purchased it was a different story. Now they want heathier fare and they are actually purchasing it! Additionaly, the so-called healthy options that MCD provided were small crappy salads. I know the menu is cluttered already but how about a turkey burger and some sweet potato fries?

  80. I hold IBM stock long term for the same reasons you do. I almost doubled down but didn’t have the right capital to do so. I think long term they are a company most like GE (turnaround) but mixed with MSFT or CSCO or even INTC. IBM will figure it out over time i have no doubt. I just was trying to clarify the WTF aspect of the fab/chip business sale. On paper it makes you think that OMG they PAID someone to take a loss leading business? But the reality is they did it for a very beneficial reason. I can only imagine the finance/accounting guys when they decided to do that. *shudder*

  81. Scott, i’d be careful of the “chipotle is healthier” rave going on. I love me some Chipotle. But just look at the bowl they give you compared to the nutrition calculator. Chipotle is piling on the “# oz” of stuff on the calculator, it’s way way over that. You think you only got 1oz of cheese and only 4oz of meat and rice? I’m not being snark but weigh your food at home and tell me if that makes sense and matches.

    http://www.chipotle.com/en-US/menu/nutrition_calculator/nutrition_calculator.aspx

    I easily eat the same calories with a Big Mac and small fries as one one of the Chipotle bowls. Is it “healthier”? I have no idea, but its less calories depending on my bowl / burrito.

  82. Nice article DM. I am too tempted to initiate position in IBM after the recent drop. But I already have too much weight in the tech sector (HPQ, GOOG, XLK and AAPL) and HPQ is almost similar to IBM. So I am still not sure, but on the fence. I might initiate if the price continues to drift down or if IBM is coming out with plans to increase their revenue (not just EPS by buy backs).

    I already hold positions in KO that I recently initiated and my average price is over the current price. So might continue to add KO to average down, but also wish that it goes down a bit more… maybe in 39s.

  83. Scott,

    Hmm, I’m not sure about sweet potato fries. Seems like a good idea, but not for McDonald’s. At least, not to me. I actually think their fries are one of their stronger points. I can’t remember ever once hearing someone talk about how much MCD’s fries suck. Some of their other products, sure. But not the fries.

    I agree with you on the salads. It seems that other major competitors (like Wendy’s and Chick-Fil-A) both offer substantially better salad offerings. You’d think they could come up with something a lot better. This was one of the items I was referring to in previous comments about menu improvement.

    A turkey burger is interesting. I wouldn’t mind seeing them offer a couple of different “beef” choices, but only if it didn’t extend wait times or clutter up the kitchen. They’ve already had problems with that in the past.

    I honestly think complacency has gotten the better of MCD. I think they have less of a food problem and more of an image problem. It can be rectified, but it takes action.

    Cheers!

  84. DGJ,

    Ahh, you do have pretty healthy exposure to tech over there. I don’t think I’d feel real comfortable going in any heavier either if I were you. Of course, I would have never had such exposure in the first place. But different strokes for different folks. I think there’s some great companies in the tech space, but it’s like musical chairs where you have the haves and have nots change places every decade or so. As such, I limit my exposure there because I don’t have the ability to tell who will be where. That being said, I like IBM quite a bit because they’ve been playing that game a long time and haven’t ended a round without a chair yet. 🙂

    Thanks for stopping by!

    Cheers.

  85. Both IBM and KO are great company. I still think KO is fairly pricey. Below a 15 P/E would be nice. IBM is interesting. I think it’s fairly price right now, maybe a little under. Hopefully the stock prices will continue to decline for both. I only have to wait another week before I have fresh capital again, woot woot!

  86. He made some valid points and instead of addressing them, you’ve told him to take his criticism elsewhere. Not much of a discussion if all you want is validating back slapping posts here. If you were really passionate about investing you would take into consideration any view that difers from your own.

    His post was far from just trolling.

  87. Those are big companies, well divesified in a fast changing world. Pretty straight that will sometimes get hit by this or that fact. I believe most of big companies survive and will tend to return a decent amount of money to shareholders.
    But big companies, sometimes, colapse.

    Have you heard about Portugal Telecom and Espirito Santo bank in Portugal? The bigger telco around here and the 2nd larger bank. 11B and 6B capitalizations, two of the biggest in the country. The first almost disapeared and the bank has closed. Really messy around here.

    I wrote about Portugal Telecom in one comment on your site maybe 1 year ago. Is there a chance to recover it?

  88. IBM is constantly playing catch up – just like MSFT was doing with Ballmer. Playing catch up means most of the profit is all ready gone by the time you got even with your competition. .

  89. sceptical,

    “His post was far from just trolling.”

    I disagree and so do other readers. As I stated before, Kyith has been here a few times now. And every comment is the same. I’ve engaged him before and he comes back with the same type of comments every time. At some point you stop feeding the trolls.

    Cheers!

  90. Trader,

    Hmm, I haven’t heard of those particular companies before or the issues over there. Sounds like pretty rough times. Sorry to hear of that!

    Unfortunately, I’m not able to recover your old comment. I switched from Blogger to WordPress a while back, and it’s difficult to specifically search for comments left under the old platform. If you have an idea of what article it might have been under I can see if I can find it that way.

    Best regards.

  91. Dave,

    I don’t actually see anything in Microsoft’s financial reports that shows they did bad at all under Ballmer. People can formulate opinions about someone, but I like to look at numbers. Numbers don’t lie. And MSFT’s numbers during his tenure aren’t bad at all.

    Take care.

  92. Agree with both of your judgments. IBM does look appealing valuation-wise, and I’m considering making it my November purchase. I agree that is risky though; no one even mentions IBM at my software company. Take that as you will, but I don’t think we’re alone in that. It is a bit concerning that it doesn’t have that cachet anymore among techies, but it’s still financially sound at least. I honestly wouldn’t buy too much. And I still feel KO is overvalued. Good points all around.

  93. hi Dividends Mantra, if i am always on the same points, isn’t it clear that those points is what i felt as strong considerations?

  94. Hi Joel, so you think i am just here because i want to post a link. Just to be clear, that website under my name isn’t my main site but a dormant site from long ago which i haven’t update for 8 years.

    I didn’t even put the two sites i have here out of respect. There is a difference between trolling and engaging a healthy debate.

  95. Dividend Mantra,

    I enjoyed reading your article and I largely agree with what you said. I don’t actually own IBM but I purchased 50 more shares of KO yesterday after they fell by 6%. Personally, I’m not really worried about the long term fundamentals for Coca Cola. If someone only looks at the overall revenue and EPS figures then I can see why they would be concerned; however, it’s more important to look at the different geographical segments to understand why the operating results missed expectations.

    For the third quarter, volume fell 5% in Europe. I would attribute the drop in volume more to economic weakness in the area rather than to consumers looking for healthier options, because Still beverage (non soda) volume fell alongside Sparkling beverage (soda) volume. Even if European consumers start looking for healthier options I would still expect to see an increase in Still beverage volume once economic conditions improve.

    In the Eurasia and African segment volumes increased by 4% and pricing added another 7 points to net revenues. The problem here, though, was a relatively stronger dollar which lowered revenues by 5 points. I realize that currency fluctuations have a real effect on Coca Cola’s profits and cash flows but the dollar will not be relatively strong forever. Coca Cola’s Eurasian and African segment is the company’s smallest in terms of revenue and profit so there is a large amount of growth potential here.

    Both Latin American and Asia had volume growth and both had unfavorable currency fluctuations. So, really, when you look outside of Europe and the United States things are growing. Sure, nearly half of Coca Cola’s revenues come from the United States but people also have to remember that the United States only accounts for about 5% of the world’s population. There is massive growth potential in the world’s two most populous countries, China and India, with the latter seeing double digit volume growth in the past quarter.

    Ultimately, Coca Cola hasn’t had a great 2013 or 2014 as far as revenue and EPS are concerned but let’s not forget that both of those metrics were about half of what they are now just 10 years ago. Nothing goes straight up for ANY company each and every year. Even a company like Apple, which has seen enormous growth in the past decade made less profit in 2013 than they did in 2012. I have more faith in the long term prospects of a beverage company like Coca Cola than I do in a tech company like Apple or Facebook; and I’m certain that Coca Cola will outlive both of those companies and will continue to grow earnings and pay more in dividends 10, 20, even 50 years from now.

  96. Hi Dividend Mantra,

    I am rather surprise with the way you take it. I was more incredulous that you take it as a trolling post. And seem to forget that I do not come here and ‘attack’ every post that you make, including your moves to freelance, leaving florida, moving back, your expenses report. The most that i pointed out was that its not right to eat the cheapest food around and that there are cheap ways to exercise than use the gym, if you want to cut down on your expenses.

    I think i raised something that every investors should be concern about. I raised some flaws in an analysis. I raised some flaws in your investment process. And to be fair most of those that I talked about are rather important for a dividend investor, the ability for a company to cover the dividend with their free cash flow. IBM is something i looked in the past and i felt thats where i can add value. Notice i didnt talk much about KO. Its got a different verticals.

    I felt that, if you really want everyone to agree with you on every topic that you right, then fair enough, I won’t post this kind of post any more.The investors survived the longest such as Charlie Munger, the Tiger Cubs, Seth Klarman came up with great investments because they ask hard questions about their investments. If their investments survived the hard questions then you know you hit the jack pot.

    We all have our bias when we buy company, or when we follow a certain investing style. And beware the herd mentality when you have a group of investors that does things the same way. It might not mean all are right, it may mean that few recognize that there are more needed to be added to the process.

    As a blogger i grew the most when folks ask me questions that i cannot answer. I have to find out if they are trolling or not, or why i didn’t know that. If we don’t ask questions and resolve them how can we grow. If you want a greater conviction in the 40 companies that you are invested, the only way is to take a hard look at them. read into them. ask hard questions and openly debate about them. We are not experts inn all areas and that is where others can value add.

    At the end of the day, I don’t really feel good seeing another investor lose their money, hence i pointed out some questions to be raised.

    I am sorry if you feel this is trolling and i have ruin your day, but you certainly make my day worse, by thinking this is trolling.Even if you kick me i will still be reading your blog by rss feed. I felt there are something that I enjoy.

    Good Day and hope you sort everytihing out with your family and your GF

  97. I love your articles Jason, great job once again. 103 comments already, sheesh! I bet you spend more time answering comments than writing your articles now. 🙂

    Long KO

    Best of luck,
    CD

  98. DD,

    I’m not on the inside in regards to any tech firms, but the hearsay seems to indicate that they have lost a bit of their cache. That’s unfortunate, but I don’t think it’s the end of the company or anything. Their financial metrics seem to indicate that they’re relatively fine, but I do agree that some concrete growth plans (with real numbers attached) need to be formulated at some point here.

    However, it’s important to keep in mind that IBM is a lot more than a software company, as software is about 25% of the business (based on revenue).

    But I’m with you. I wouldn’t want to be too heavy into IBM here (or any other tech company) even with the apparent value. And that’s simply because future earnings visibility is a bit more unclear than many of the other companies I invest in and watch.

    Thanks for sharing! 🙂

    Best wishes.

  99. Kyith – I could argue ALL your points but will choose not to. It will get me no were. DM’s blog is not about that, nor goes his readers like that. This is a positive blog and your negativity is not welcome here. I as many others think and know DM’s analysis is far better than most TV talking heads. You’re just being rude. If you disagree so much with DM”s articles, why don’t you start your own blog on investing. Or you can be sensible and add positive feedback to the article, instead of being combative and fine fault.

    DM – You don’t need me to tell you this but this post is much better then all the articles I read lately on KO and IBM’s Q3 filing. Please keep up the good work. You’re readers appreciate it.

    Thanks,
    Frank

  100. Ryan,

    “Nothing goes straight up for ANY company each and every year.”

    Yep. You nailed it right there. I actually wrote this article specifically because a lot of the commentary on various investing sites have been about how these companies are somehow dying now after these results, specifically IBM. And that’s why I tried to provide some long-term perspective to these rather short-term troubles, and provide context as to why these short-term problems exist in the first place. To look at one quarter or even one year and make an investment decision based on that is really just shortsighted, in my view. So that’s why I included the last 10 years worth of financial results. These companies, while stalling a bit right now, are extremely healthy and growing just fine. Furthermore, both are extremely likely to be paying more dividends in 10 years from now than they are today. IBM has a much lower payout ratio, but KO has a much more stable and defensive business. Something to like for everyone. 🙂

    But you get it. The key is to focus on the long haul. When I buy shares, I buy for the next three decades or longer. Thus, I don’t really care about a quarter or two. I won’t even remember this quarter 10 years from now, and neither will you.

    Thanks for stopping by and dropping some wisdom on us. And I appreciate the perspective there in regards to Coca-Cola’s regional results. I agree with you. Europe is rough on ALL companies right now, not just Coca-Cola. It’s just a tough place to do business right now.

    Best regards.

  101. Kyith,

    You didn’t ruin my day and I hope I didn’t ruin yours. However, I find it funny that you talk about “adding value” when very few of the comments you’ve ever left here add any value at all. Furthermore, the very discussion we’re now in is what I try to avoid because it doesn’t add value at all.

    I don’t mind criticism, especially when it’s constructive. You’ll notice that many of the comments in regards to this very article don’t necessarily agree with what I’m saying. No big deal. I still spend a great deal of time responding to every comment so as to learn, teach, inspire, and share. I’m not always right, and hindsight is 20/20. But I’m trying to become a better and more informed investor every day.

    However, you have a habit of stopping by and giving off condescending comments that add nothing to the discussion. Frankly, I have no idea why you continue to read the blog or stop by and comment. If I really had such disdain for a writer, his/her analysis, or general view on investing I would promptly find other works to read.

    Finally, this wasn’t an analysis. I was simply adding to the discussions about IBM and Coca-Cola that are all over the internet. There’s been a lot of negativity about the “death” of these companies, specifically IBM. I was aiming to provide perspective and context to the discussion, not start it over. I offer analyses when I make stock purchases and go a bit more in-depth then. To do a full analysis on KO and IBM in one post would be far too verbose and really unnecessary for the point I was trying to make.

    Cheers!

  102. Captain,

    Thanks, bud. Really appreciate it! I’m glad you enjoyed it. 🙂

    I do spend a lot of time with the comments now. But I think there’s a lot more value in the comments then in the article itself. I know I learned a lot more conversing with others than I did putting this piece together.

    Glad to be a fellow KO shareholder.

    Best regards.

  103. Frank,

    Thanks. I’m glad you found some value in the article. As I was pointing out to Kyith, this wasn’t a full analysis. Rather, I was simply attempting to provide some perspective and context to the Q3 results. In addition, I’m trying to remind everyone to keep an eye on the long term. Neither company is “dying” from what I can see.

    “This is a positive blog…”

    I’m glad that comes across! I’m not someone who ignores risks, as all of my analyses point out risk. However, I try to provide a counterbalance to all the doom and gloom you get in mainstream media. The mainstream media focuses on the here and now, whereas I tend to focus on the long term. It’s just a very different perspective, which I suppose contributes to my optimism. After all, I don’t know how anyone can look at that long-term chart I posted the other day of the S&P 500 index and not get warm and fuzzy feelings. 🙂

    Thanks again for the support!

    Best wishes.

  104. Thanks for the response, Jason. It is good that you have compared the DDM calculated by you to Morningstar. What I’ve found is that the DDM valuation varies tremendously with changes to the inputs.

    About Rometty’s leadership, remember the Buffet quote (paraphrased a bit) “I want to be an owner of a business that will be successful if it’s run by a ham sandwich, because sooner or later you are going to get one running the company”. Hopefully she isn’t the ham sandwich he was referring to.

    -Mike

  105. Mike,

    Agreed. The DDM analysis is quite sensitive to the input, so I remain vigilant in using realistic and conservative numbers in my growth predictions. I tend to find the two-stage DDM more appropriate for stocks with very low yields and really high growth rates that aren’t particularly realistic over the long haul. V is a good example. However, I don’t tend to invest in those types of stocks all that often.

    And I certainly hope Rometty isn’t that ham sandwich. I can’t say that I’ve come across anything in the annual reports or investor presentations that really “wowed” me as far as Rometty goes. I’m not quite sure she has the appropriate command of the company or the market. That being said, that’s not an impossible problem to rectify. I love a good manager/management team, but I invest in the company first and foremost. IBM was around long before Rometty and I’d predict it’ll be around long after.

    Best wishes.

  106. KO and IBM are already some of my largest positions, so I’m not sure I want to add any more right now. IBM concerns me a bit more. Cutting expenses can only take you so far before you start to hit diminishing returns.

    The KO earnings report seasons are the most fun. Oh no, Coke only make 2.1 billion dollars in the last three months! That’s terrible! Sell, sell! 23 million dollars in profit a day just isn’t good enough for some people.

  107. Kyith,

    I was not going to respond to your post, because I would only be feeding a troll, but I’d like to know the URL of your blog(s). I doubt you have a better blog than this.

  108. I’m not sure about the post. Maybe one about about telco or Vodafone.
    Nevermind, only curiosity, I really don’t remember what I wrote back then.
    Cheers!

  109. Numbers don’t like. MSFT’s share price was lower when he left his tenure from where he began and is up over 28% since he left. But if you want to look at real stuff: Longhorn (mistake), Vista (mistake), thought mobile was a fade (mistake), trying to buy out YHOO again and again – delaying Bing (mistake), letting the XBOX languish for 9 years (mistake), Kin (huge mistake), played follow up on Cloud computing (mistake) losing 53% of the browser space to Firefox and Chrome because of bad security (huge mistake) and those are just off the top of my head but it equals billions and billions of lost profits. Ballmer was forced out veiled as retirement to spend more time with family.

  110. Justin,

    Thanks for stopping by!

    I agree that IBM needs to improve the core business. There’s only so much profit you can squeeze out of the same top line dollar. At some point you simply need more top line dollars to extract profit from if you’re looking to grow profit. Of course, the massive drop in the stock only made their share buyback more effective (for as long as it remains cheap), thus negating some of the need for revenue growth. Ironic how that works.

    That’s a great point there on KO. Too funny! The company is growing free cash flow to the point to where it was $8 billion last year (over $6.5 billion just two years prior). I’m okay with KO making billions upon billions, and generally making more over any five-year rolling period in their history. I think I can sleep okay at night. 🙂

    Cheers!

  111. Dave,

    Mind telling me what MSFT’s EPS CAGR was over Ballmer’s tenure? What about the growth in revenue? Cash flow? Dividends?

    I’d love to know! 🙂

    Cheers!

  112. Dave,

    By the way, you are aware that MSFT’s stock price went up by 400% between March 1997 and the end of 1999 – just before Ballmer’s tenure – right?

    Edit to add: And you’re also aware that the CEO of a company has little to do with the company’s stock price? That’s what I talk about all the time here. Value and price are often disconnected. Furthermore, Ballmer took over just as the tech boom ended and the Nasdaq crashed.

    Cheers!

  113. I think that there is still value in both companies. KO is still a beverage giant with many billion dollar brands just like you said, and they are constantly working to keep their brand image strong while diversifying into other beverage markets. It may just be that in the future they are less of a Coca Cola company and more of a ‘insert health beverage here’ company.

    IBM is doing similar things in that they’ve been getting out of the hardware business for quite some time and are focusing more on their business solutions segment: consulting, troubleshooting and software(IRRC). Massive companies like IBM take time to do that though, so hopefully its just some growing/adjusting pains that will result in a more profitable IBM in the future.

  114. I appreciate the thorough analysis. I heard these stories on the news and it seemed like the sky was falling! Short term fluctuations shouldn’t mean much to long term investors, and certainly shouldn’t cause them to sell in a panic. But this invariably happens, leaving value to be had for everyone else.

  115. Could you imagine a world without Coke? Could you imagine what Christmas would be like if Coke didn’t put that red and white outfit on Santa Claus in their commercials back in the day? I love the product and the Company, but the management is rubbing me the wrong at the moment. That’s why I’m not buying..yet.

    IBM is in a tough spot, but I believe they’ll pull through eventually. I just added to my position and averaged down a bit.

    Thanks for another great article Jason :).

    -Ville

  116. Kyith, very interesting questions that I hoped DM could answer and also go deeper into. It is sad to see that there is nothing of this to be found and the response is more or less: don’t like it? Then get the hell out..

    I guess DM is mostly for the real amateurs that should be bying indexfunds before direct investments in stocks.

  117. Everything went up from 97 to 99 When everything was going up from 2009- till his departure MSFT went no where. He was shown the door and the share price has rhinoed since. How much better would the EPS have been if Ballmer would not of been behind on mobile, search and security, etc, etc? Share price is up over $16 per share since he left. If he was still there it would be sub $30.

  118. Very nice article! I just love having the long view, it allows us to calm down in the face of seemingly horrible news. It isn’t as if these companies will decide to roll over and die, one bad year among decades of good news is not bad.

    Sorry I wasn’t able to comment sooner, but Spoongirl and I just moved to the PNW and we are busy getting settled in. This bit of geographic arbitrage is allowing us to live without jobs!

  119. DW,

    I’m with you all the way. These are both large, dominant companies that are still throwing off billions of dollars. 99% of the other companies in the world would love to be in either position. I doubt either one is going to be growing like a small start-up anytime soon, but that’s not why one invests in KO or IBM. We invest for the stable, growing cash dividend payouts. And both companies are highly likely to be paying out more dividends for at least the next decade and beyond. 🙂

    Thanks for dropping by!

    Best regards.

  120. Syed,

    The sky is falling! Tune into our station so we can tell you all about it. 🙂

    Leaving value to be had for everyone else, indeed! You just have to be there to scoop it up. I’ll tell you I just scooped up shares in one of these businesses yesterday, and I’ll be going over that transaction next week. This left me a bit short on cash, but value is value. 🙂

    Cheers!

  121. Ville,

    Glad you enjoyed the article!

    I definitely can’t imagine a world without Coke. More to the point, I can’t imagine a world without companies out there producing bottled water, sports drinks, RTD tea, energy drinks, juices, etc. And the odds are good that 10-20 years from now it’s going to be the same dominant players. As such, I’ll be happy to keep collecting my rising dividends. 🙂

    Glad to hear you averaged down on IBM. The valuation is extremely compelling, in my view. I hope IBM keeps buying back stock right now, amplifying the effects of their repurchases.

    Best wishes.

  122. Sverige AB,

    As I said before, I’ve engaged Kyith in the past. At some point, you just have to move on.

    If you’re looking for negativity surrounding KO and IBM there is plenty of it out there. I’ve already addressed the point that this article wasn’t meant to be a full analysis on either company. I was simply providing context and perspective to the recent drops, especially in regards to fundamental valuation.

    Take care.

  123. Dave,

    That sounds like conjecture and speculation to me. Again, Ballmer has little to do with MSFT stock. It’s not his fault the stock was massively overvalued before he took control of the company.

    Do you mind running over the growth rates in revenue, EPS, cash flow, and dividends during Ballmer’s tenure for me?

    Cheers!

  124. Spoonman,

    Hey, I hope everything is going well up there for you guys. An exciting new adventure!!! 🙂

    The sky is definitely not falling. IBM isn’t dying. KO isn’t dying. It’s funny how I’m hearing about “collapsing” earnings in regards to IBM, yet they’re still growing at 7% YOY. I think a lot of companies would love to have “collapsing” earnings like 7% growth during an off year.

    Have fun up there!

    Cheers.

  125. Hello DM,

    I respect your feelings in moving on though i haven’t read any of your earlier discussions. So whom am I to say about that.

    Still i find the query somewhat interesting because i might be looking for the same angles as kyith may be, and in your response.

    We all look for different things but I surely enjoy a kill the company view from a stock owner. I think it is essential to have in the bag so to say.

    I look forward to future writings about the companies from you, I know that negativity is easy to find when looked for.

    Regards and take care.

  126. Just a quick question. I saw you talk a lot about the valuation of IBM, and I’m comments I see you talk about your hope they are accelerating their share repurchases. No where do I see you talk about the debt they are taking on to fund the repurchases. IBM now has an alarming debt to equity ratio and roughly 35 billion dollars in debt. I also saw you talk about their massive backlog of 128 billion dollars. Their current sales are 98 billion for the year. 128 billion is basically just the future years worth of sales, not that impressive, in my view. Care to comment on their debt and how the backlog is roughly only 12 months of operations? Those are my two biggest issues with IBM. Thanks!

  127. Oh also, you talk about how they grew earnings 7%, but once again these earnings are fabricated through issuing debt to repurchase shares. I can assure you this party will end poorly at some point. Their debt was 21b in 2010, 32b in 2013. Eps is growing, but at what cost? If rates rise this debt could seriously jeopardize their business.

  128. took2summit,

    Great question there. I probably should have mentioned the debt load in the article because it seems to confound/confuse people more than any other stock for some strange reason. I wasn’t attempting to fully analyze either stock (as I mentioned in previous comments) but rather provide some perspective/context to the recent drops and offer some color commentary on what we’re really looking at here as far as the long-term picture goes.

    I’m actually going to copy and paste a previous comment because someone else asked the same exact question already. And I’d answer it the same way:

    “I’m glad you brought up the debt issue. I didn’t do a full analysis on either KO or IBM because that wasn’t the point of the article. However, IBM’s debt seems to confuse people. Specifically, I’ll address your point about taking on more debt. Plenty of major companies out there have been taking on more debt over the last 10 years. IBM is far from alone, and I’m confident far from the biggest offender. It makes sense to take on low-interest debt if you can leverage that into greater returns. For instance, you and I both own Pepsi. Their long-term debt has exploded from $2.3 billion to $24.4 billion over the last 10 years. Meanwhile, IBM has gone from $14.8 billion to $32.8 billion. One went up approximately tenfold, and the other about twofold. Pepsi has an interest coverage ratio of ~11. IBM sports an interest coverage ratio of ~49. So if either firm has a debt problem, it’s Pepsi.

    I tell you this not to sway your thinking on IBM or to criticize your comment. Rather, I encourage you to do some critical thinking. Instead of just reading articles on blogs or Seeking Alpha and assuming they have a debt issue, run through the numbers for yourself and do some real comparisons.

    Since you are interested in buying more KO – their long-term debt increases are much the same. Their long-term debt has increased from $1.1 billion to $33.1 billion over the last 10 years. That’s thirtyfold. It’s important to not just look at debt, but to look at that within the framework of overall operations. And as the numbers show, IBM has taken on less long-term debt over the last decade while employing higher returns than Coke.

    Keep these things in mind before assuming one firm has a debt issue, or is somehow any different from any other company.”

    You can obviously factor out the Pepsi note, but I just used Pepsi as a comparison because that particular reader has a stake in the company (like me). However, the Coca-Cola comparison is apt because they’re both blue chip companies that are similar in size. I find it weird/funny/interesting that people talk about IBM’s debt load and share buybacks, yet ignore Coke’s massive increase in debt over the same time period.

    As far as the backlog goes, I’m confused. Their revenue is set to drop to about $94 billion or so after the recent restructuring. So the backlog is about 1.36 times annual revenue. Do you have a list of companies that blow that out of the water? GE is another example of a massive backlog. They sport a $250 billion backlog as of Q3. That’s 1.72 times 2013 revenue. I think these numbers are respectable for both companies.

    Cheers.

  129. Not a fan of IBM. Revenues have not grown in years. If they have such a great backlog, I’m curious as to why they can’t see to ever grow their revenues? Only earnings per share are growing as they are buying back shares. That doesnt seem like a great long term strategy. I would wait and see if they can turn the business model around.

  130. From my research it looks like total company revenues are around the same as 2004.

  131. I see KO the same way I see Mcd’s – both are large companies with a solid history of growth. As you said judging based on one quarter is short sighted. Sure, they had a tough quarter, but they’ve proven they can adapt and will bounce back. Same as Mcd’s.

  132. envisionhappy,

    Fair enough. IBM isn’t for everyone. The good thing is that there are thousands of other publicly traded companies to choose from. I also would like to see revenue increase at some point in time; however, it’s not necessary to have a profitable enterprise.

    Let me ask you a question:

    If you could invest in a company that routinely grew revenues by an 8% annual clip but simultaneously lost money/broke even and paid no dividend, would you?

    Or would you prefer a company that saw flat revenue but was able to continuously increase profitability through a combination of increased efficiency, margin expansion, and buybacks, and also increased dividends at an extremely generous clip?

    I’d chose the latter 10 times out of 10, but that’s just me.

    Now, I’d love to see revenue, earnings, and dividends all increase routinely at a healthy clip, like KO. However, keep in mind as well that IBM has absolutely killed KO as an investment over the last 20 years.

    Best regards.

  133. Dan,

    Thanks for stopping by!

    I’m not discounting their headwinds/risks, but I think they’re a bit better off than others are making them out to be. Perhaps a case could be made that the valuations don’t offer an appropriate margin of safety for the additional risks due to changing trends; however, neither company is dying. I think MCD faces bigger issues than KO, but I don’t think these issues are insurmountable.

    Best regards!

  134. Just to pile on as one more person who works in the tech industry, and is pretty skeptical of IBM’s long-term prospects. One big concern is that tech is largely about the talent you can attract… and when was the last time that IBM was a destination of choice for really talented engineers or tech business minds? At least Microsoft and Yahoo! are still relevant enough for the cool kids to polk fun at… IBM is in the sadder position of being a non-entity as far as the new waves of tech are concerned. Of course, the hot new stuff is much smaller today than IBM’s legacy businesses. But, in tech every legacy business shrinks over time – if you’re not getting in to new businesses, you’re going to slowly fade away. And, you’re right about past pivots, but I have not seen any evidence that leadership today is able to look beyond tactics and execution to a realistic growth strategy.

  135. Hi Jason,

    Hope you’re doing well.

    I haven’t read all the comments here because wow.. it would take me the day! 🙂 You’re a Terminator man! It’s seriously pretty cool that you take the time to answer all those comments. That Kyith sounds like a funny guy… :p You’ve heen patient enough with him in my own opinion. He should go buy himself Ramen noodles :p

    We all know that you don’t have a CFA, that you are not a certified advisor (even though I know that most of them are as good as flipping a coin) and we don’t expect your posts to be 10 pages Morningstar analysis of stocks. You know your things damn well. I read a lot of posts here and I saw you improving over time. You get better and better as time pass by. You might be wrong in some aspects but there’s always a buyer and a seller in the market… Even Warren Buffett is still learning and wrong sometimes… In the end whatever analysis one can make, predicting business success is far from being a sure thing anyway and to predict weather or to predict business success we have to rely on the past and extrapolate what we think will work again in the future. There are a lot of variables in the equation…

    I just wanted to say that I like what you do. You’ve achieved great success in both blogging and investing. You’ve encouraged and inspired a lot of people including me to take their finance seriously and just that is worth every minutes you spend here writing or commenting.

    Finally, I have a question for you. What DCF calculator are you using and how do you use it. Let’s take KO for example. You took a 10% discount rate which is your expected rate of return. And then you take a 7% percent earning growth per year which seems fair but do you expect earnings to grow by 7% forever? When I read and tested DCF calculators I found that there are many pitfalls in using them and one can really get the value he wants. Most of what I read suggest you put a margin of safety in your numbers and expect growth for a limited number of years (5-10 years) and then you should assume no growth or long term inflation. When I compute the numbers in http://www.gurufocus.com/fair_value_dcf.php I get something around 25$ for KO… If I can one day get shares at that price… well I’ll buy a million 🙂

    I’d like to know with what numbers you feel confortable and had success with?

  136. I added a few shares of IBM this week. I was not overly exposed to technology so thought why not. IBM has been around for a long time and I trust that what they experience now will be another little thing of the past one day ;).

  137. I greatly enjoy your blog. Thanks for providing all this useful information.

    Re IBM – what are the actual profit drivers for this company – are they mainly a consultant firm at the present time? I simply don’t understnd their business well enough to invest.

    In tech I own AAPL and ORCL.

    Re KO and MCD – I see less risk in companies like these. Either they will get it right on their own, or Icahn and others will swoop in and change things.

    I think that’s harder to accomplish with a Tech company. Remember when HWP bought PALM – was good product – but tech cycle time too quick, AAPL (and Blackberry) had already left them in the dust by then.

    Cheers,

  138. Tad,

    I’ve heard a lot about this. It seems there may be a morale issue inside IBM, though I can’t really comment as I’m not familiar with the inner workings of the company like that. Perhaps the shedding of personnel over time has damaged that side of the business. However, any large business that shrinks one side of the company to embrace a new side of the business eventually builds up enemies and people that are bitter toward being cut. Human nature. However, I haven’t really seen anything from the bigger picture that tells me there is some cancer inside the company.

    As far as leadership not being able to execute, I think it’s hard to see execution in real time. It’s easy to look back and point at what went right or wrong. But in the midst of rebuilding it’s easy to assume that nothing will really work out. It kind of reminds me of a lot of investors that talk about how they’re value investors, but when a company really runs into the skids and becomes cheap (like IBM) nobody is real interested in loading up.

    That’s not meant as criticism, but more as just general commentary on what I’ve noticed throughout the years. It’s easy to say something (I’ll invest when this stock tanks) and much harder to do that same something in real life.

    That all being said, IBM has considerable risks. So I don’t think it’s the steal of the century or something. I think it’s very cheap on a fundamental basis. Qualitatively, changes need to be made. And management has been keen to recognize that, in my view. The shedding of $7 billion in business that’s losing IBM money is a good example. However, I would agree that management needs to be more clear on where exactly the company is going from here. There’s a lot of language on opportunities, but it seems to me to be more vague then necessary.

    Thanks for dropping by!

    Best wishes.

  139. Allan,

    Thanks for the kind words there. I’m definitely getting better every single day (as both a writer and investor), and I have you guys to really thank for that. I’ve learned a lot here by interacting with others and fleshing out my thoughts on these posts.

    But you are absolutely right. I could have put together a 10,000 word essay on both companies and it doesn’t really change anything at all. I still can’t predict the future and neither can anyone else. Furthermore, I’m not here to convince anyone of anything. I’m simply here to inspire others by showing them what’s possible with consistency, good habits, patience, and perseverance. You can have all the money in the world, but it won’t make a difference if you can’t make good decisions. Furthermore, I’m also not here to talk anyone into buying or selling stocks. I simply offer perspective, especially the long-term kind. What you do with that information is all up to you. I obviously don’t charge for my services (they wouldn’t be worth much anyway), and rather share only what I truly believe in. And that’s because I put my money where my mouth is. 🙂

    As fara s the DDM calculator I use, I use a spreadsheet that came with Matt Alden’s book on dividend growth investing:

    http://dividendmonk.com/dividend-book/

    He doesn’t write on his blog anymore, but the book and spreadsheet are definitely worth a look. The DDM analysis is based on the Gordon Growth Model.

    As far as the growth rate used, that’s in line with Coca-Cola’s long-term historical average and management’s guidance moving forward. It may be hard to imagine a company as big as Coke growing that much, but they’ve been mature for a long time now. And they’ve grown like that for a long time. Furthermore, the fair value I came up with is in line with Morningstar. Whether or not Morningstar got it wrong as well is really up to you.

    I don’t anticipate Coca-Cola will grow at a 7% rate “forever”. The DDM analysis does take the calculation out to infinity, and then discounts it back to the present day to account for the time value of money. However, I won’t be alive for forever. If Coca-Cola is able to grow at a 7% rate for the next 40-50 years then they lived up to their end of the bargain, the price I paid was appropriate, and I will have generated solid risk-adjusted total returns and fantastic dividend income. So that point you really have to ask yourself whether or not management’s guidance is correct and if the last 10 years serves as any kind of proxy for the next decade and beyond. I think so, but you may not agree. In that case you’d want to use a lower growth rate and invest only when the stock drops to a level below that number to account for a margin of safety. However, if you believe that the fair value for KO is $25 I’m afraid you’ll be waiting for a long time to invest.

    I hope that helps! 🙂

    Best regards.

  140. Fab,

    I’m with you on adding to IBM here. The valuation seems extremely compelling, even factoring in for much less growth going forward. They could halve their dividend raises and it would still be an extremely cheap stock. We’ll see what we get!

    Glad to be a fellow shareholder. 🙂

    Cheers.

  141. Stockman22,

    No problem at all. I hope you find a lot of value in the posts. I put my heart and soul into the content here. 🙂

    I would be careful with comparing Blackberry with IBM. Very different companies with very different business models. Furthermore, Blackberry didn’t change with the times. IBM is well-known for their ability to adapt, and a primary reason I’m an investor in the company. The pains they’re going through right know are directly related to change and adapting.

    As far as KO and MCD, I agree there’s a lot less risk there than with IBM. But the valuations reflect that. IBM’s valuation is about half of Coca-Cola. So Coke has much higher expectations to meet before you even get to solid returns going forward. IBM barely has to grow here in order for the investment to turn out solid. I think there is room for both in my portfolio, which is why I’m invested in both. Furthermore, it’s precisely because KO’s business model has less inherent risk that I have much more invested in the company. I can sleep better at night knowing that it’s unlikely anyone is going to topple Coke as the beverage leader anytime soon. IBM, on the other hand, faces a lot more willing and able competitors.

    But that’s what makes it a market. There are a lot of stocks out there. There are over 550 stocks on David Fish’s CCC list, so there’s no reason to invest in IBM or any other stock you’re not totally comfortable with. I don’t think any returns are worth not being able to sleep at night.

    Thanks for dropping by!

    Best wishes.

  142. DM, I found your website a little over a year ago, maybe more. I read it daily —without fail. I am a big fan so you know. I have never commented before so this is my first.

    I believe you are being a bit thin skinned with regards to Kyith. I do not see anything he wrote as an attack, or even rude? I am not sure I agree with him and I understand your responses back to him, but he is bringing a different dynamic which I don’t mind seeing on the blog.

    While I read all your articles–and most of the comments–I do not read all the comments on all articles, so I have never seen him comment before. One of the reasons I don’t read all the comments is that its gets to be a little much with all the glad handing and high-fiving with other fellow bloggers—many of which I read daily also.

    Sometimes it seems that all the DGI bloggers (about 50 or so) are just writing articles for the others bloggers to comment on so everyone gets a few page views. I am not a blogger and I don’t plan to be one. It’s just simply not my thing. Nor do I know much how advertising and page views works in terms of blog income. I don’t really care much either. I am just a guy who is investing like mad because I came late to the party and need to catch up.

    I don’t consider myself all DGI either, I am somewhat about income as well.

    I guess what I would like to see is some more thoughtful constructive criticism. More questing of certain aspects of the path. Example. On many occasions, I have felt you have bought too high. Many other bloggers as well. I know why you are doing that–you have a long term horizon—you will just buy more when it goes down, etc. I get it. Still, I think buying right is sort of an art, with some science. Rarely do I see anyone say, “Geez, DM you bought way too high–here is my price point and here is why”. Anyway that is just an example.

    I also get that you are trying to put out a positive vibe. You do it–for sure. It is noticeable and one of the reasons I visit each day. Still, being positive doesn’t need to come at the cost of engaging discourse where two parties can agree to disagree respectfully. When you have that, you then get to add adjectives like stimulating, exciting and thought-provoking to positive.

    Anyway, I do not know why I chose to write my first post on this issue. Perhaps, I like to see the skeptics, perhaps I am a questioner. I don’t know.

    Keep up the good work. Mike

  143. Well, what you are describing above is known as “market timing”. There are MILLIONS of people who try to do it, and dozens, maybe hundreds at most, who have EVER consistently succeeded. You might as well play the lottery if you are trying to buy and sell stocks constantly. That is how the stock market CRUSHES small time investors. Jason and others aren’t dumb and realize this. You can’t time the market. I can’t either, nor can Jason or any other DGI bloggers. So, knowing this, all you can do is consistently put your capital to work in the highest quality companies that exist at that time, month after month, year after year.

  144. Tom, I do understand that and no this isn’t market timing I do the same, I sock away as much as I can every month in some investment, but I choose to do that with the stocks that offer the great value at the time of investment.

    Trust me, I came to the party late so I need to invest. Just want to do that at the best value. Thanks

  145. Mike,

    I appreciate the comment and point of view. Everyone is entitled to an opinion of course.

    However, my opinion is that I’m not thin skinned. Believe me when I tell you that I’ve had my fair share of criticism over the years, especially when I hit the mainstream media. However, there’s a difference between constructive criticism and criticism out of spite. Kyith has been here before, and it’s generally a “you suck” kind of thing. No big deal, but I also have a right to stop engaging someone. His most recent comment was furthermore incorrect in that I didn’t reference the sustainability of the dividends in question or talk about profits. That’s pretty much all I did.

    As far as buying too high, I cannot time the market. Nor can anyone else. You would do well to read the article I referenced in my recent “Weekend Reading” post which discusses why time in the market is more important than timing the market. Moreover, value is subjective. You may feel a stock is a better value at $X. I may feel differently. Such is the market. Always buyers and sellers. However, I’ve done fairly well for myself over the years. I also hold the opinion that buying a high-quality company at $33 or $34 or $35 doesn’t really matter when we’re talking about long-term holding periods. I’ve actually read some research citing how someone who bought AMEX just before the salad oil scandal would have done just about as well as Buffett over the long haul. Quality and value matter much more than catching the absolute bottom, which is why I could care less about that. I attempt to buy high-quality companies at a reasonable valuation and then let time do the rest. Watching someone else come by and buy at 4% or 5% cheaper or whatever matters not to me and my goals. Furthermore, 20 years down the road it will make little difference in the long-term returns. I’m not saying value doesn’t matter. Quite the contrary, it’s extremely important to try to build in a margin of safety and avoid overpaying, as this reduces risk and increases the yield on the same dollar spent. However, it’s not all that matters.

    You are welcome to your opinion that writers write for other writers, but I can assure you – from a writer to someone who doesn’t write – that you are incorrect. I write to inspire others into action, as I’ve been open about since the beginning. Furthermore, you’ll notice that a lot of the people that stop by – you included – aren’t fellow bloggers. However, fellow bloggers are people and investors too. Keep in mind that a number of bloggers in this space started out as regular readers. They came by and later were inspired to start their own journeys, and they started blogging about it. I think that’s incredibly wonderful.

    That’s just my perspective. Again, you’re more than welcome to your own.

    Cheers!

  146. I will add to my comment just make what I am saying clear. What stands as a turning point for me in reading DM was his TGT purchase. I remember it like it was yesterday. His first purchase was at $66 something, I don’t recall the exact number. But I remember saying to myself then, there is no way in heck that $66 is the right price for that stock at that time. In the meantime I was buying something else (don’t recall what it was).

    Then he followed up with another buy in the $62 range. Again, way too high as I was watching the same stock as he was.

    When TGT hit the $55-57 range we both bought it (DM & me However, my purchase has increased in value his has likely decreased. Same company, same metrics, same everything.

    Now let me be more clear. I understand his (and others) long term philosophy and that he is much more interested in dividend income than capital appreciation. I get it. He is also a 20 something, like many of the DGI bloggers commenting, and starting their own blogs since 2009-2010 (seems most started at the best time–and great for them).

    However, I turn 50 tomorrow. I have to be very careful what I buy and when I buy it. I am only buying the cream of the crop just like DM, but I don’t have the time he does. So, you see, I need more that the 20 something I don’t care about capital appreciation mantra.

    Jason’s blog is very uplifting. I love it. The message is so simple I wish I would have discovered DGI in my 20’s like he did. I didn’t. I like his positive view and his attitude but it was the TGT purchase that made me understand I have to do everything he is doing AND more. I am socking away a lot of a pretty good salary every two weeks but I have to be every vigilant and patient in my purchases.

    I hope that made sense.

  147. These are good points, Jason. I actually think that the IBM management is likely pretty good at execution – I think it is big vision where they are falling short. The comparison to Steve Balmer made in an earlier comment is a good one, in my opinion. I believe Balmer has been unfairly judged. But, he was ultimately a good steward of existing businesses, rather than a builder of new ones. In most indistries, being a good executor is more than enough (banking, retail, etc.), but I think technology is different, where just executing leaves you behind in the long run.

    I feel bad that a number of comments I have left here come across as critical. I really enjoy your blog – it’s often just most natural to comment when there’s something you disagree with. To your point above “It kind of reminds me of a lot of investors that talk about how they’re value investors, but when a company really runs into the skids and becomes cheap (like IBM) nobody is real interested in loading up” – I think you did a great job of helping me pull the trigger on ARCP for exactly that reason. It became a decision of “unless there’s accounting fraud, this thing can’t go any lower.” I’m already up $0.50/share. So, thanks for pointing out good buys like that one!

  148. All good comments DM and I do understand. My next comment on the site will hopefully more uplifting. 🙂 Like I said, I don’t know anything about blogging, AND you are inspiring so you have that right. Me included.

    Agree, value is also subjective. Thanks for the welcome I plan to participate a bit more now that I have about three years of investing I might have something to add.

    I don’t consider what I do timing, but I have a system that values a company and I am patient because there is always a bargain out there. I have bought high before and that has whipped the lesson into me of patience.

  149. Mike,

    I regret the timing on TGT in hindsight, but not the logic or the valuation. I value a stock based on all known data available at the time of purchase. My initial TGT purchase was at a price of $66.50 when professional analysts were valuing shares in that range. Furthermore, the data breach was announced not long after that. I don’t think it’s really accurate to paint my TGT purchase as somehow a bad valuation call because the company announced a massive problem not long after.

    You obviously have a right to the opinion that the TGT purchase was a bad call on the valuation; however, you’d have to then indict professional analysts of the same. Furthermore, it’s awfully strange that you pick out TGT – a stock that faced unprecedented issues shortly after I bought – and not the countless stocks I’ve purchased over the years that have since appreciated handsomely. Just something I happened to notice.

    Cheers.

  150. Tad,

    I think we’re in agreement here. I’ve not been particularly impressed with Rometty as far as her ability to communicate general direction. I’m no tech expert, and I’ll openly admit that. But I get the value in IBM’s business, their entrenched position in services, and the general long-term trends in cloud computing and data analytics. I understand that and IBM is well-positioned to ride that wave. But is Rometty the best captain of the ship? I’m not sure. I think execution is important, but you have to be more than just a number cruncher. Maybe Rometty rubs people the wrong way. I don’t know.

    Appreciate the support there! And I’m glad you pulled the trigger on ARCP. Very little growth is necessary for it to turn out to be a solid long-term investment. Their portfolio of properties is enviable and will ensure reliable and growing cash flow. It would require absolute incompetence or outright robbery from management to turn this thing sour over the next 10-20 years.

    Best regards!

  151. Good points. Not for me but IBM is definitely shareholder friendly. They definitely are good at controlling costs and rewarding shareholders. But to answer the question, no I wouldnt invest in a company that increases revenues while losing money – like Amazon. Fortunately there are a lot of good companies increasing revenues and profits. Thanks!

  152. Well its because (TGT) I have only been following you for a year or so and it stuck out. I really don’t recall all the details at that time but I just know that one stuck out. There is NO DOUBT you have done well DM. I don’t dispute that at all and I am not here at all to cause fighting or drag anyone down. I am a big believer in your message and path.

    I only wish I would have started in 2009 in you and some other bloggers. I imagine that was a mighty fun time with pickins all over the floor. That doesn’t matter much right now so I have been following you and some other DGI bloggers and I find you buy higher than I most of the time. I also know why that is. It is because of you philosophy, age, and time horizon. I have none of that going for me so I need to buy at a pretty good value–then, I’m sitting on the investment til I cash in.

    I bought high on HCP and it has cost me–I am up, but only slightly because I was not patient. I have bought low on Coke and I am +10%. Both Dividend Champs, both solid dividend records. The only difference in my success on those two is when I chose to buy.

    I am more value conscious because I am older I think.

  153. By the way, I would love to see an article on your regrets. I believe it is mostly from our mistakes (bad word) or things we have not done perfectly where we learn the most. Like you I regret the timing on HCP. I was buying $44-$45, I bought again when it it $36’s but what a mistake that I wasn’t patient enough.

    Just my 2 cents.

  154. Mike,

    I think we disagree here about timing. You’re looking at timing stocks at the perfect price. That’s not at all what I prescribe. I put a great deal of importance on valuation, but I’ll tell you that buying in at the perfect, lowest possible price just isn’t necessary.

    You mention buying HCP was a mistake at $44. Why? Sure, you could have bought in at at $36 later, but what if it wouldn’t have gone to $36? You sound like someone who’s guilty of price anchoring. I would recommend you do some serious reading on anchoring and how it can turn you against yourself. If HCP would have just gone up from $46, you would have felt great. But because it went to $36 you feel like you made a mistake. You’re letting the stock market you bully you around. You keep mentioning your age, but this has little to nothing to do with what we’re really talking about here. Value is value, regardless of how old or young you are. You’re talking about timing even though you say you’re not.

    You’re not discussing the fundamentals or valuations in any of your comments. Just price action. Price action means little to me or any of the other investors that stop by here and subscribe to this strategy.

    I wish you luck, my friend. But we have completely opposite viewpoints on price, value, timing, and long-term investing.

    Edit to add: Mike, I like your idea about investment mistakes. I’ve written about financial mistakes, but never investment mistakes. I may write about that sometime. However, my investment mistakes will be related to companies that I bought that later cut dividends (like Telefonica – luckily, I foresaw the dividend cut and sold before) or stocks that I sold that I shouldn’t have (like XOM and ABT). I won’t be writing about stocks that I paid $X for when they were later available for less than $X. Which further adds to my belief that we are coming from totally different viewpoints.

    Cheers.

  155. Well, I’m not looking for the “perfect price” just the best one with what information I have at my disposal at that time. I have not mentioned fundamental analysis in these comments because that was not my point really. I do use it.

    I do agree with you that in the long term certain price points are irrelevant. So, I do not worry if I have looked at a company—like what I see–and buy 5-10% above where I think the most desirable price may be at that moment in time—but when I miss by 20%, as I did with HCP, then I consider that a flaw in MY investing demeanor which is to seek value at a certain price below fair market value. I jumped the gun and I think I can improve. That is all I am saying.

    HCP is a dividend champ. I am really unconcerned with its future performance and I think I have a winner there. For me its a SWAN stock. Still, like you with TGT, I regretted buying when I did. That says nothing about the company which I like. It says something about me. I blew it. Jumped the gun. I am betting if could go back in time, I would see another stock with BETTER value that I could have bought. That is all I am going for. Strong companies at the best price I can get them at that moment. I am training myself for patience.

    Perhaps I am a little too hung up on that. I don’t know what anchoring is but I will check it out.

    I just looked at your portfolio for the first time in detail. I only own 11 companies at the moment–(just started in Aug 2012) but 7 of them are also in your portfolio so I don’t think we are really of differing minds.

    There are two champs I own that you do not (HCP & CTBI). I own SO, you own other utilities–and my risky element is SDRL. Talk about a ride…LOL SDRL has been a hoot, but I allowed myself one risky one. I am taking a bath at the moment but that is OK. I am also honing my nerves of steel. 🙂

    Keep in mind also, I think —I could be wrong—I have noted a slight change in your investing as of late from when I first started reading you. I have heard you talk about the “phase” stocks recently. It seems to me you are buying lower yields but higher growth? Again, I read you daily, but I also read a lot of other stuff so I could be confused but that is just my gut as I write this. It doesn’t really matter tho. You portfolio is awesome and your focus when you started might not be your focus now. That’s evolution. One thing we are definitely different in is that your portfolio is much larger.

    I have approximately $40K now and expected (2015) do add $24K, so I am nowhere near you but I want to be. So, I will keep reading.

    Although I know it will not matter to you, next time I see what I think is a high buy on a company I follow and track I will comment and give my points. Right now I have about 85-90 on my watch list, but there are only about 15-20 that I would consider in my buy range and as you pointed out that is a bit subjective.

    Anyway, DM–lets close this up because I don’t want to be at odds with you or go on anymore about this. I am a daily reader and will continue to be. I just didn’t really see anything negative with that guy’s posts and wanted to comment on that mostly. Perhaps I missed other posts of his. Not sure.

    Cheers to you too. Mike

  156. I sold IBM the first day they dropped. I kept KO, but with a very small position. I personally think that IBM is a value trap and I Would not pay more than 130 or less. I will wait until they grow their earnings and revenues again. I also think that their strategy of buying back their shares might well backfire. As to KO I would add once they come to 25-26. Could I short, I certainly would short IBM.

  157. Aspenhawk,

    You’re definitely not alone in regards to not being optimistic about IBM’s future. There are a lot of IBM haters out there right now. I guess we’ll see how it goes. I’m not pushing all my chips in on IBM, as I never intended for it to become a large position. However, I think the valuation is compelling here. The dividend growth could permanently halve and it would still be a solid investment here. Furthermore, it’s important to be mindful that there are a lot of other companies out there that haven’t grown in some time but are still great investments. Chubb is a great example.

    I hope you’re having a great weekend!

    Best regards.

  158. Ooh, BURN!!! Just play in’ around.

    On a more serious note, stick price should never be used to judge a company’s performance, especially in dividend growth investing. The price falling just gives us a chance to buy more and increase our annual dividend income (provided the company is sound). A rising stock price just prices us out. We aren’t looking to sell, anyway, so why is a rising stock price such a wonderful thing?

  159. Your point about KO having 17 different $1 billion brands is telling, as the (alleged) serious health consequences of consuming Coke/Diet Coke are becoming increasingly widespread to the point that I hear about/see the information on a near daily basis. Moreover, my best guess is that millenials will lead, at least in this country, to a marked, and continued, decrease in the consumption of soft drinks. While 20 years ago I think it would have been a solid bet that the consumption of Coke would continue to increase. If you ask me the same question today, my best guess is that in the US (if not most first world nations) the amount of Coke consumption will plummet over the next two decades.

  160. Joel,

    I agree that carbonated soft drinks are on the decline in major developed countries. The numbers point that out. I imagine at some point Coca-Cola’s leading beverage will simply be something other than a CSD. In the meanwhile, I like their moves into the K-Cups, coffee, tea, and energy drinks. As long as people have to drink something the odds are good that Coca-Cola will manufacture, market, and sell it.

    One other point is that while developed countries drink less CSDs, developing countries are picking up some of that slack both in CSDs and still beverages. Global overall volume continues to increase. 🙂

    Best regards.

  161. Hi,

    My name is Sparaklokt from Sweden “Sparaklokt” means Savewisely. Nice blog you have!

    I bought my first american stocks, Coca Cola (40,46) and IBM (162,73). I think it was a wisely investing from my side :).

    Good Luck!

    // Sparaklokt

  162. Sparaklokt,

    That sounds like a great name. I like it! 🙂

    I think you made some solid investment choices there. Both are blue chip stocks, with deep corporate histories. The odds are extremely strong that each will be paying more dividends year after year for the next 10 years and beyond.

    Wish you luck! Thanks for stopping by from Sweden. Appreciate the readership.

    Take care.

  163. Hi,

    I´m fairly late in this discussion but I think it is useful to comment something for IBM two months later. I was thinking about this company when it felt down to 160 $ with all the negative information they gave. In the meantime I´m not thinking of buying it because they have problems where they have to work very hard for and this isn`t done in two or three quarters. OK, you get the share much cheaper than six months ago. But the business modell is not healthy at the moment like other IT companies. Normally it takes a time if they achieve a turn around. On the other side there is always a risk that they cant´t achieve this turn around and it can take the way like Digital Equipment, which is a extreme example.

    I´m always sceptic to invest in companies which have heavy problems. The chances to gain big profits with the stock price is possible, but normally this lasts years and you are not in a hurry to buy this candidate. Normally these cpmpanies cut the dividend or even don’t pay a dividend for some time periods. So if I would have this share I would change this position to another company which does not have these problems at the moment. I don´t sell shares very often, but sometimes a strategic change is usefull.

    I come from Germany and we have some similar candidates in the DAX, which were in the past growing top companies. They all have problems at the moment and all cut their dividends, one even to 0. If you look at RWE, Deutsche Bank, Commerzbank or Kali&Salz (K&S) you can see a possible future scenario for IBM if the problems are getting worse or the problems are not ending or getting better. These are really old companies which were for decades really successful and people lost a lot of money there the last two or three years. Same for Adidas at the moment. So be careful with IBM.

  164. olli816,

    There’s no doubt that IBM has some challenges in front of them. But of course that’s when high-quality companies are on sale. If everything were rosy and easy for IBM, the shares wouldn’t be cheap.

    The good news is that their dividend is very healthy. I’d love to see the revenue growth pick up again here at some point, but in the meanwhile they produce prodigious free cash flow. Fundamentally, IBM is in great shape. It’s just that they’ve had problems growing the top line, which isn’t totally surprising when we’re talking about a company with $100 billion in revenue.

    But the stock market offers plenty of stock choices. Nobody has to buy any certain stock. If IBM (or any other company) doesn’t fit your portfolio, then it would make no sense to purchase it. I think it’s undervalued, even with little top-line growth to be had. But others will surely disagree.

    Thanks for stopping by!

    Best wishes.

  165. Hello, i’m new here and enjoy reading your blog. Thanks for all your hard work and sharing! Do you know to find online the dividend CAGR for the stocks you invest in?

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