Did IBM Buy Red Hat At A Fair Price?

Introduction

On October 23, 2015, I wrote an article titled “Retirees: I Did Not Buy IBM to Sell; It’s about the Dividend Income Stupid.” At the time I published the article, I was long International Business Machine (IBM) and remain long today. With the article, I attempted to illustrate why I was including IBM in retirement portfolios. As the title so brashly stated, it was about the dividend income. Stated more directly, I was investing in IBM to augment the yield of my dividend growth portfolio based on the company’s quality and financial strength.

Moreover, I talked about the many varied investing strategies that investors could implement. Specific to my IBM investment, it’s important to emphasize that I intended to hold the company for many years to come, and still do. Therefore, I am not too concerned about short-term price volatility simply because I have no intention of selling anyway. Additionally, I had, nor do I have, any delusions about IBM generating significant short-term capital gains. In fact, I was confident that I would have to be patient on the capital appreciation front, but as I stated in the article:

“A Growing Dividend Income Stream Was My Purpose for Investing In IBM

I have been and continue to be aggressively adding IBM into retirement portfolios. However, even upon my first foray into the company, I was never expecting substantial capital appreciation, at least over the short to intermediate term. Instead, my attitude about investing in this company was based solely on the opportunity to receive a safe, above-average and growing dividend yield. On that basis, IBM has proven to be a resounding success because, as I expected, IBM’s dividend income has steadily increased.”

Here I would also add that dividends are paid on the number of shares I own and not based on the current market price. This is simply another reason why I am not too concerned with price volatility. It will be many years from now before I decide that it is time to sell IBM unless I truly come to believe that their financial strength has deteriorated to the point where I can no longer trust their dividend. However, at this point, I have no indication that this might be happening. In fact, I believe the Red Hat (RHT) acquisition gives me confidence that fundamentals may actually grow again at some point in the future.