Shares of IBM (NYSE:IBM) may sound like a good value play. The company has a long track record of annual dividend increases. The dividend yield is high, the price to earnings is low, and the free cash flow per share is high. It may sound like it fits perfectly to the value investment strategy. No wonder Warren Buffett took a big bet on IBM in 2011. It was the perfect case according to his value investment style. However, the business has deteriorated sharply since his investment decision. There are many red flags that stand out. Particularly, my concerns point to following issues:
- Decline in revenue over multiple quarters
- Revenue growth driven by acquisitions
- Decline in the sustainable cash flow
- Tax management to manage the bottom line
- Decrease in dividend payment ability
- Levered balance sheet
Perhaps that was the reason why Warren Buffett reduced his stake and why Moody's downgraded the stock by one notch. All of these make the long investment argument for IBM much weaker than it was in 2011. Let me please back-up the red flags with supporting evidence.
