Cure for the Big Blues: IBM Just Took Another Major Step in Its Path to Revival

Editors' Pick: Originally published Feb. 19.

"Creative destruction," a term coined by famed economist Joseph Schumpeter, is now at work to revitalize IBM  (IBM) , the grandfather of information technology. But judging by the drumbeat of pessimism over IBM, you wouldn't know it.

IBM Chart

IBM data by YCharts

Founded in 1911, IBM is continually dismissed as a hidebound corporate relic that's destined for the tech sector's historical dustbin. IBM's headquarters in the Westchester hamlet of Armonk, N.Y. is a long way from the cooler environs of Silicon Valley, where the hipster billionaires behind Apple and Alphabet are creating world-changing gadgets, computer software and online services.

But the investment herd is quite mistaken about IBM, which spells investment opportunity for you. And while you wait for IBM's strategic moves to lift the stock's price, you can enjoy the high dividend. In these days of 1% CDs, it's tough to find a yield worth getting excited about, but IBM's dividend yield of 3.9% is nothing to sneeze at. Here's why IBM is a rare opportunity in what promises to be a tough year for the broader markets.

On Thursday, "Big Blue" took another step to proving the conventional wisdom wrong, when it announced it would pay $2.6 billion for Truven Health Analytics, a health care information technology company that has accumulated data on the cost and treatment of about 300 million patients. This marks the fourth company that IBM has bought since it formed its Watson Health division last April, bringing the total spent on health care acquisitions to $4 billion.

Truven possesses crucial payment information on patients that includes detailed coding on disease categories, diagnoses and treatments. IBM's Truven acquisition is another sign that IBM's management, led by CEO Virginia Rometty, won't be deterred from its strategic repositioning toward health IT, despite recent disappointing operating results for the company as a whole.

Super investor Warren Buffett grasps the wisdom behind IBM's reinvention, a clear indication that IBM's blueprint isn't desperate wishful thinking. Buffett's Berkshire Hathaway increased its stake in IBM in the third quarter of last year by about 2% to 81 million shares from 79.6 million, for a value of $11.7 billion. That makes IBM Berkshire Hathaway's fourth biggest holding.

Rometty and her team understand that the most valuable commodity in the business world today is information, especially in the health care field, where success isn't just measured in dollars and cents but also in human lives.

One of the hottest trends in the health sector is the spread of electronic record-keeping among doctors, hospitals, clinics and other providers. As the use of Electronic Medical Records proliferates and the technology behind it becomes more advanced, the federal government is mandating its use. By latching onto this unstoppable trend, IBM is setting the table for growth in 2016 and beyond.

First, let's look at the bad news that has been feeding pessimism over IBM. For full-year 2015, diluted earnings per share came in at $14.92, down 10% year over year. Earnings came in at $14.7 billion, down 12% from 2014. Revenue of $81.7 billion was down 1% from the previous year.

IBM's stock is down about 4% year to date, but it was down much more on Feb. 11, before shares rallied in recent days as investors started to catch on that IBM might be in turnaround mode. By comparison, the Technology Select Sector SPDR ETF is down 5.1% year to date, while the S&P 500 is down 6.4%.

IBM is in the midst of a profound corporate reinvention that is "creatively destroying" its old business (mainframes) in favor of cloud computing, analytics and big data -- the sort of value-added services for which IBM can charge a premium.

And as Thursday's announcement about Truven shows, IBM also is making a big bet on medical technology, a booming field.

IBM's stock now trades at the absurdly low trailing-12-month price-to-earnings ratio of 9.9, compared with 37 for Microsoft and more than 17 for the industry of information technology. IBM's strong dividend yield should provide you with steady income as you wait for the company's shrewd strategic repositioning to pay off. Count on this storied company to continue its journey from mainframe chump to health care champ.

As we've just explained, IBM belongs in your dividend portfolio. If you'd like to learn about a group of high-quality, high-yield income opportunities that are far too ignored by most investors, I urge you to check out this free presentation: 11% Yields and No Taxes. Inside, you'll learn about one of the greatest gifts to income investors in the last century, and how you can begin taking advantage of it today for your portfolio. Click here now to learn more.

John Persinos is editorial manager and investment analyst at Investing Daily. At the time of publication, the author held no positions in the stocks mentioned.

More from Opinion

Facebook Needs to Tread Carefully Now That Instagram's Co-Founders Are Leaving

Facebook Needs to Tread Carefully Now That Instagram's Co-Founders Are Leaving

Tuesday Turnaround: Tilray's Toking

Tuesday Turnaround: Tilray's Toking

3 Software Stocks Now Available at a Discount

3 Software Stocks Now Available at a Discount

Microsoft Takes Aim at Oracle, Amazon and Others With Ignite Announcements

Microsoft Takes Aim at Oracle, Amazon and Others With Ignite Announcements

Monday Madness: Nike Just Does It

Monday Madness: Nike Just Does It