By: Matt Thalman
Should you follow Warren Buffett’s lead and sell your shares of International Business Machines Corporation (NYSE:IBM)?
A key to the answer is the current valuation of the IBM shares. Also consider that Buffett generally stays away from technology companies, since he admits to not fully understand them and their prospects.
But six years ago, Buffett announced he was building a stake in a well-known technology company, IBM. Buffett recently announced Berkshire Hathaway Inc. had cut its stake in IBM when its share price had reached $180 and he wondered if it was topping out.
In a recent television interview with CNBC, Buffett explained he had “revalued” IBM and he doesn’t believe the company is worth what he thought it was six years ago when he started buying shares. Since his first purchase, IBM’s stock is up 9%, while the S&P 500 has risen 90%.
At the end of 2016, Berkshire Hathaway owned roughly 81 million shares of IBM. Berkshire Hathaway sold roughly 30 million shares — more than one third of his stake in IBM – since then but has told reporters he is done selling the shares for now.
His reasoning appears based on valuation of the IBM shares. When he started selling, IBM stock was trading at $180 per share, whereas the stock now trading in the $150 range and appears to be undervalued.
Many analysts’ criticized Buffett for years for avoiding the technology industry and now his first foray into the field appears to be a failure, compared with the performance of the S&P 500 during the time he has held IBM shares. However, Buffett now also is invested in another big name technology stock, Apple Inc. (NASDAQ:AAPL), and the latter investment has been doing well.
Interestingly, there are similarities between IBM and Apple, which could be why Buffett has decided to make these his first two big technology investments. Both are stocks that pay a dividend. Plus, each has a solid dividend paying history and the means to continue paying a dividend for some time.
Both IBM and Apple are also technology leaders. Some of their businesses are simple to understand, while other aspects are slightly more difficult. Furthermore, Buffett said his mistake with IBM was that he didn’t give the competition enough credit. Apple may well face heightened competitive challenges but a secret to its success has been keeping its customers from switching to its rivals. Years ago, Apple’s big allure was its iTunes ecosystem, while today it has shifted to its cloud storage.
If Buffett knows that cloud storage what makes Apple great, it makes sense that he brushed off Apple not quite reaching the first quarter’s expected iPhone sales figures.
Regardless of Buffett revaluing IBM when its share price reached $180, the question for investors now is whether the stock is worth buying or holding at its current price of about $153 and how much the shares may climb in the future.
For investors who are looking for a healthy dividend paying stock, IBM is a decent buy today at its current trading range of around $153 and a 10-year projected dividend yield of 8.18%, based on the latest forecasts of www.DividendInvestor.com.
Matt Thalman has been writing since 2011, shortly after gaining his MBA, but his love for the markets began in undergrad when he first learned about the awesome power of compound interest. Thalman mainly focuses on consumer-facing stocks and general investing topics, but will also cover other areas of the markets if he believes there is something important investors need to know. Follow him on Twitter @mthalman5513.
At the time of this writing, Matt Thalman owned shares of Apple.