International Business Machines Corporation (NYSE: IBM) is one of the oldest and largest technology companies on U.S. stock exchanges, and had a market capitalization of $144 billion as of June 2016. Between 2006 and 2016, IBM shares grew from $77.10 on a dividend-adjusted basis to $146, an 87.6% return. Financial performance was mixed, but earnings remained relatively strong and dividends continued to grow. However, investor confidence has soured on IBM's long-term potential and strategic initiatives. The company has struggled to amass market share in new important categories, causing a sell-off that resulted in exceptionally low valuation ratios.

Stock Price History

IBM's stock rose from $77 in June 2006 to a peak of $129 before the stock market crash. November 2008 saw a low point for shares, which fell below $70 at one point. IBM recovered quickly from the stock market crash, rising to nearly $210 in March 2012, but the stock met resistance around that price, failing to appreciate substantially for a full year. Shares began to trend downward in 2013, with major adjustments occurring in October 2014 and the summer of 2015. Attractive valuation ratios and high dividend yields brought conservative investors back into the story as market conditions deteriorated in early 2016, driving a nearly 7.5% improvement over the benchmark large-cap index over the first half of the year.

Financial Results

IBM did not deliver sustained revenue growth from 2006 to 2015. Revenue was $91 billion in 2006 and $81.7 billion in 2015, bringing the 10-year average growth rate to -1.08%. Sales peaked in 2011 at $106.9 billion and then declined in four consecutive years. Analysts suggest that IBM is losing market share and failing to gain sufficient traction in strategic categories like cloud and data analytics.

While revenue slumped, operating margin expanded. It surpassed 19% in 2012, 2014 and 2015, rising far above the 13% achieved in 2006. These gains were driven primarily by improving gross margin. This was accomplished by divesting lower margin businesses, particularly hardware subsidiaries. Better margins helped bring the 10-year average operating income growth rate to 5.28% and the average earnings per share growth rate to 10.67%. Earnings per share of $13.42 in 2015 was only surpassed by $14.37 in 2012 and $14.94 in 2013.

Despite downsizing and experiencing falling sales, IBM also sustained a growing dividend, which rose every single year, beginning with $1.10 in 2006 and reaching $5 in 2015. The company carries high leverage, which could be unattractive to conservative investors who see uncertainty in the tech giant's strategic repositioning.

Equity Market Relationship

The Standard & Poor's 500 index returned 61.5% over the decade, roughly 26 percentage points less than IBM's return. IBM grew faster than the S&P 500, in the two years preceding the market crash, and then it pulled away through the recovery into 2012. From that point, IBM slowly flattened and declined, while the S&P 500 continued to grow, buoyed by sustained low interest rates and improving economic conditions in the United States. IBM's correlation coefficient relative to the SPDR S&P 500 ETF (NYSEARCA: SPY) was 0.569, indicating a positive relationship with limited explanatory value. Company-specific factors were clearly a driver of share prices.

Peers and Sector

IBM fell below its peer group after driving superior returns between 2010 and 2012. The SPDR Technology Sector Select ETF (NYSEARCA: XLK) returned 107.8% in the decade leading up to June 2016. With investor confidence falling, IBM shares depreciated during the boom period from 2012 to 2015, in which tech stocks outpaced the also-expanding S&P 500. IBM was outperformed by several large peers such as Oracle Corporation (NYSE: ORCL), Accenture PLC (NYSE: ACN) and Microsoft Corporation (NASDAQ: MSFT), which managed returns of 174%, 326% and 122%, respectively. IBM's correlation coefficient relative to XLK was 0.621, further supporting the importance of company-specific valuation trends.

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