By recent metrics, International Business Machines (NYSE:IBM) had a decent first quarter. The company beat analyst expectations of $2.41 adjusted EPS and revenue of $18.82 billion, according to data from Thomson Reuters, by reporting $2.45 and $19.1 billion, respectively.
The revenue figure is notable because it was the second time in a row that IBM reported year-over-year revenue growth, although this figure was aided by favorable currency tailwinds; before last quarter investors endured five years of revenue decreases. IBM also reaffirmed prior guidance of $13.80 per share in adjusted EPS.
You'd expect shares to rally, albeit slightly, on the positive news. Instead, shares of the company sold off approximately 7.5% as investors digested a decline in storage revenue and analysts were hoping for a full-year EPS-guidance increase. However, IBMs problems were decades in the making, and one critical statistic bears this out.
IBM has spent billions on shareholders with little to show
The bearish thesis against IBM was best explained by Stanley Druckenmiller at CNBC's Delivering Alpha conference in 2014. Commenting on the lack of robust growth after the Great Recession, he pointed to stock buybacks at the expense of innovation and growth:
I would say IBM is the poster child. They literally faced a threat not too dissimilar to what Kodak and Xerox [confronted], in terms of a new technology staring them right in the face. Instead of increasing investment to combat the threat, they've actually borrowed a lot of money to buy back stock.
Druckenmiller is right. IBM has spent a significant amount of money on its shareholders with little to show. Perhaps the most depressing statistic is IBM has spent approximately $150 billion on investors in both dividends ($45 billion) and stock buybacks ($105 billion) but is now only worth $137 billion. Essentially, IBM has spent an IBM on its shareholders and has little in the way of returns to show for it.
IBM's decade in charts
A better way to compare IBM is to look at the chart below. In the last decade, shares of IBM have increased by only 19%, which pales in comparison to the 94% return the greater S&P has produced.
The logical counterargument is the 19% gain was better than IBM's actual market capitalization performance, which declined by 20% during the same period. Including the dividends paid, IBM has returned 52%, a much higher figure. However, the S&P 500's total return, including dividends, has increased by 140%, which still points to tremendous underperformance from the company despite $150 billion in capital return.
Rometty didn't create IBM's problems but isn't solving them either
Just so I'm clear, IBM's problems predated Ginni Rometty. While spending tens of billions on stock buybacks annually to ensure the company would hit an ambitious goal of $20 EPS by 2015, the company failed to adjust to a fundamental shift to cloud computing and storage, which strikes directly at IBM's mainframe and server businesses.
Increasingly, it's looking like Rometty isn't the solution either as internal problems are starting to arise on her watch. In 2017, IBM was criticized for Rometty's pay package, which was valued at more than $30 million, while the company has continued to struggle. In the end, 46% of shareholders voted to reject her proposal, but it was a non-binding vote meaning Rometty kept the pay package. This year ProPublica and Mother Jones alleged the company systematically discriminated against employees over 40 years old.
Rometty's plans to turn the company around are to double down on what she refers to as "strategic imperatives," including artificial intelligence. However, seven years post-Jeopardy win, many people -- including former employees -- claim AI-powered Watson is more marketing hype than world-changing technology. Last year IBM lost the faith of legendary investor Warren Buffett, with the Oracle of Omaha selling off more than half of his position. Increasingly, it appears more investors are sharing Buffett's opinion.