International Business Machines (ticker symbol: IBM) is one of those iconic stocks in the diversified technology sector that investors want to own. But with a lofty share price of $194.62 today (5/31/12) - down from a 52-week high of $210.69, this Dow Jones Industrial component’s share price is too high for many regular investors. Luckily IBM has a dividend reinvestment program (DRIP) and direct stock purchase plan (DSPP) available through their transfer agent Computershare. This way investors can buy fractional shares monthly and/or quarterly and reinvest IBM’s approximately 1.75% dividend easily. But IBM should split their stock to make investment simpler, and more attractive, to more investors.
IBM Should Split 4 to 1
IBM Options: Calls, Puts, and Hedging
Of course, a company DRIP plan is convenient, but one of the downsides of having the DRIP plan away from a retail brokerage account is that it’s not possible to buy or sell calls or puts to build or hedge your holdings with options.
With individual options contracts representing 100 shares of stock - it’s not possible for retail investors to accumulate IBM shares conservatively through the options strategy of CSP’s (cash-secured-puts). To sell a cash secured put on IBM now requires over $19K in a non-margin account. In our hypothetical split situation, investors could sell a CSP for $4866, a much more reasonable number - actually about the equivalent of a one year ROTH contribution.
Why Invest in IBM?
This is an extraordinary company which has accomplished the nearly impossible task of reimagining its core businesses. From typewriters, to desktop computers, to big data analytics and a whole host of cloud computing-related IT services, IBM has managed to stay relevant and current for decades. Now with global consulting, business services, IT infrastructure, and financing - the company has been growing quarterly earnings by over 7% (according to Yahoo finance) with a solid focus on higher margin businesses. With a forward P/E of less than 12, IBM stands to be an investment selling at a valuation below the S&P500.
The business intelligence and data analytics area, with performance management, and the wide range of global growth possibilities gives IBM an edge in AaaS - or analytics as a service - something they are putting to work in various segments of their business. As smartphones, social media, and GPS create petabytes of unstructured big data, look to companies like IBM for real leadership roles in cloud-based analytics - even with the promise of natural language processing. (It could be that some future version of “IBM Watson”, the supercomputer that kicked-butt on Jeopardy, is likely the tool that makes interfacing with this business intelligence a regular tool of the data scientist, and the corporate decision-makers.)
Positioned for Long Term Growth?
Looking at IBM's 2011 Annual Report, the company -- under the leadership of CEO Virginia M. Rometty, and Chairman of the Board Samuel J. Palmisano (IBM CEO from Jan 2003 to Jan 2012) -- outlined the current plans of its 2015 Road Map. These "growth initiatives" are the complementary areas of Growth Markets, Cloud, Business Analytics, and Smarter Planet.
So... yes, IBM (and every other very expensive company like MasterCard, Apple, Google, Berkshire Hathaway, Caterpillar, and others) should split its stock, and make it easier for more investors to buy shares. Of course, a split increases the float and doesn't add any real value per se, but greater access to the shares would mean greater participation in the long term growth story of this company. (Sadly many investors consider stock price too much when they purchase shares in their brokerage or retirement accounts. $500 invested in a particular company is simply partial ownership, and a share of long-term price appreciation-- it doesn't matter whether $500 is one share or 50. But a lower, more manageable share price encourages many retail investors to build long term holdings in interesting companies with growth potential. This benefits everyone in that increased investor interest means greater demand for IBM -- or any stock after a split -- which often raises the share price.
(Disclosure: author owns IBM in a DRIP account with Computershare.)