IBM & Chevron: Taking the Long View on Optionality vs. Durability

A century-old tech company just took a gut punch from Wall Street. A century-old oil giant hasn't had an exciting headline in years. Ten years from now, which one do you actually want to own?

In this episode, Greg takes the long view on two very different dividend payers. The first is IBM ($IBM), a stock that ran from the low $200s to a high near $325 over the past year as its quantum computing story caught fire. It then dropped back to around $205 after disappointing contract delays spooked the market. Greg walks through why the selloff isn't the end of the story: IBM's debt has improved, revenue is growing again after years of stagnation, and at roughly 17 times earnings, he argues investors are no longer paying for the quantum computing option.

The second is Chevron ($CVX), a stock with none of IBM's drama and, in Greg's view, almost all of the certainty. Diversified across exploration, refining, and chemicals, with a dividend track record that held even when oil prices went negative in 2020, Chevron represents a different kind of long-term bet. It's not a call option on a breakthrough, but a compounding cash flow machine that is also a quiet beneficiary of AI.

Two very different companies, one shared idea: real wealth is built by holding through the boring years, not by chasing the exciting ones.

TOPICS COVERED

[00:41] Introduction: Two Long-Term Stories, Two Different Bets
 [03:04] IBM ($IBM): From Story Stock to Speed Bump
 [04:47] Inside IBM's Business: Software, Consulting, and Red Hat
 [08:41] The Quantum Computing Bet Behind the Stock
 [13:44] IBM's 10-Year Dividend Growth Math
 [16:24] Chevron ($CVX): The Cash Flow Machine
 [18:17] Chevron's Dividend Track Record and Financial Strength
 [20:40] Diversification: Upstream, Downstream, and Chemicals
 [21:15] Chevron as a Natural Gas and AI Play
 [23:49] Why Chevron Over Exxon ($XOM)?
 [25:45] Two Long Views, One Lesson in Patience
 [28:02] Final Takeaway: It's All About the Waiting

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Transcript

 [00:00:11] Greg Denewiler:

This is Greg Denewiler, and you are listening to another episode of The Dividend Mailbox, a monthly podcast about dividend growth. Our goal is to stuff your mailbox full of dividend checks. When they grow over time, a funny thing happens: you create wealth.

Welcome to episode 61 of The Dividend Mailbox. And today, we're going to take the long view, and we're gonna look at two companies that have different spins on what could happen to them over the next decade and beyond. They both are dividend payers.

These are two big names, and the first one we're gonna cover actually had a very attractive story that had really got the stock going. All of a sudden, the story had a little bit of a speed bump in it, but if you're looking at the long view, the story hasn't changed.

The second story, pure and simple, it's just generating cash flow long term, and there's few companies that do it as well as this one. So one of the things that I hope this episode does: you can get rich quick, which a big piece of that is luck.

But if you want to be rich and you have enough time, it's really almost has nothing to do with luck. It has everything to do with patience. It's all about taking the long view.

Just as a quick note before we get into this, dividend growth investing sounds simple, but doing it well over long periods of time takes discipline and patience.

These episodes give you pieces of how we think about it, but if you're trying to build wealth, it helps to have a clear framework you can come back to when things get uncomfortable, which is why we wrote Dividend Growth: The Quiet Engine of Wealth.

And ultimately, the real goal of it is to help you tune out the noise and make better long-term investment decisions. So if that interests you and you'd like a free copy, you can find it in the show notes or at growmydollar.com/dividend-growth-book.

With that, let's get into the episode.

The first one we're gonna look at is IBM. It was something we've mentioned in the past. We, we've actually owned it for a long time.

The first thing you may be thinking: this is a company that really hasn't done that much. It really struggled in trying to recreate itself in the last decade. They've gone through a couple of CEOs, and a few years ago, all of a sudden, the stock started to come alive.

Not only was their consulting business starting to get a little bit better, they started to see some growth again. And then in the last year or so, it really caught fire as the whole quantum computing story started to kick in.

And with AI, it just really kinda became a story stock, which is something it has not been for a long time.

But why look at IBM today? Why did I pick this one at the moment? Well, the thing had a high of about three twenty-five in the last 12 months, and now it's come all the way back down to two hundred and five.

The reason for that is pretty simple. You have a growth story that, all of a sudden, there was a speed bump in the growth story.

A few weeks ago, they came out with a disappointing announcement that some of their contracts have been delayed. Some of the things they're working on have not performed as well as they thought.

They were still showing some growth, but the absence of growth really spooked the market. Then the question becomes, okay, is this just a temporary thing, or is it a longer-term problem?

The one thing that is positive about IBM: they're not a one-trick pony. They have software, they have consulting, they have infrastructure, and then they do get a little bit of revenue from finance.

But when you take the fact that consulting has been a big question mark due to the AI world, and also software, the one thing about IBM software, a big piece of that is driven through Red Hat, which they acquired several years ago.

And Red Hat is more directed towards cloud solutions. It's not just simple: you use a software package to do a certain job, which is, which is more threatened by AI.

Now, Red Hat, is AI a problem for them? Potentially. But the story that really drove the stock, and why I'm bringing this up, is the quantum computing piece.

And it's not that I think these guys are gonna come out with something in the next 12 months on quantum computing. In fact, it's just the opposite.

What you have is a company that has improved their debt situation. It's now down to about two times equity, and it was much higher than that a few years ago.

The earnings have started to pick up. Revenue now is growing, which they failed to do for a few years back in '21, '22, '23.

Twenty twenty-four revenue is just under sixty-three billion dollars, then sixty-seven and a half, seventy-one. Value Line's got estimates of seventy-four and a half billion by twenty twenty-seven.

So now you do have some growth. Value Line estimates the growth going forward for four years at about four and a half percent. Earnings, they actually have growing at nine percent, but it's coming off a pretty low base.

The dividend yield's three point two percent, so that really fits our dividend story. But is it a dividend growth story?

Well, here's where there is a little bit of a problem, and that is, I'm just using Value Line here. They've got it growing at one and a half percent for the next four years.

IBM has always been pretty shareholder-friendly as far as dividends, and they have been a pretty aggressive buyback story until a few years ago.

Part of what happened was there was some financial engineering. They were aggressively pumping the dividend up, they were buying back stock, and they just weren't getting the growth that they really needed.

They started to hit a wall. You can't grow a dividend forever if you're not growing earnings.

Well, earnings are back on track. This year, they're supposed to be up around twelve dollars, and the dividend is expected to be a little under seven.

So you got a decent spread there. That's a payout ratio of roughly sixty percent.

You look at return on invested capital, um, it's now over ten percent. IBM, a decade ago, was actually more profitable.

Return on invested capital was up in the high teens, low twenties. Really fell on hard times, but now it's starting to come back up. So the profitability is there.

Well, in looking at it, is this something that we are interested in? The real reason why I picked this is because I think what you've got with the stock coming down so much is a call on quantum computing.

Last fall, there was an article in The Wall Street Journal. It was called “Good Old IBM Leads in the Race for Quantum Advantage.”

And basically, it was just talking about there's really three main players in this. It's IBM, Google, and Microsoft, and right now IBM is pretty much leading the pack.

There are a lot of startups out there, but one of the things about quantum computing, if you know anything at all about it, is it is extremely complicated.

It requires insanely cold temperatures. I think it's below two hundred and fifty degrees below zero, and it requires an extremely stable environment.

It keeps out a lot of players because it's just not common to go out and create that kind of an environment where quantum computing can be successful.

It's estimated to be ten years out or more before there's really anything that potentially would be on the market, but it's estimated that quantum computing could represent a trillion-dollar market at some point.

The reason why I call this one the long view: the stock trades at about seventeen times earnings, and they are in the AI space in a little different way.

They, they do do consulting. You've got a company right now that's growing. Latest earnings report, they've got expectations to grow about four or five percent this year.

There is some growth in here, and basically, the P/E is priced the way that kind of a growth story would represent. But you get paid three point two percent while you wait and see if maybe quantum computing actually becomes a real market.

Now, will it happen? Who knows? Will it ever become economically viable?

I have to say, part of me says, “I kinda hope it doesn't,” because it's a little scary what quantum computing can actually do.

I will say that it seems like it's gonna be an extremely expensive proposition. There's probably gonna be—even if it does become financially viable—there's probably not gonna be a whole lot of people that can actually afford to go into this space.

So hopefully, it'll be somewhat monitored, and there will be some checks and balances.

But that's a ways off, and one thing I think is going in their favor is, to get into this space, it's so technical and the challenges are so great that I've often stayed away from tech because I call it the, you could have somebody in their garage coming up with the next iPhone or whatever example you wanna have.

But I can virtually guarantee you that is not going to happen in quantum computing because it just, the resources are too great and the technology is too complex.

So, IBM, is this something that I'm totally convinced that is a great story?

Really, the point here is that this is a way to earn a dividend, get good cash flow. Their financial strength, Value Line's got it at A+. It's a pretty solid story.

And my guess is that you don't pay anything really for the option for quantum computing, and if it starts to look like it's gonna become viable, I would wager this stock will no longer be trading at 17 times earnings.

If you're wrong and the option didn't pay off at all, I mean, right now, software is 45%, which I've already mentioned is, the piece of it is Red Hat and actually working in the cloud.

You've got consulting, which is 34%, and you got infrastructure, which is 20%, and then financing is only 1%.

I mean, not everything is gonna go to quantum, even if it does become viable.

But you've got a company here that is growing when quantum computing adds nothing to revenue or earnings. The margin of safety is you're not paying for the growth.

Now, if you bought this stock two or three months ago, you were paying for growth, but now that's pretty much gone. That's part of what brought this up.

It's not the classic, “Oh, I'm gonna get 7% dividend growth for the next ten years.”

It's, “I'm gonna get some dividend growth, maybe a little bit better, but I've got a kicker in there that could really pay off if it works, and I just don't have to pay much for it.”

However, for those of you who are long-term listeners or have listened to some of the, uh, our podcasts in the past, when the stock moved up into the high 100s more than a year ago, we did sell part of it.

That was basically trimming a company that was struggling to find any growth.

The last few years, they finally have turned it around a little bit, and now it's a little different animal than it was a few years ago.

But one thing I will say, IBM, if you look at our 10-year dividend growth model, which is where we take the current dividend, we grow it, and we like to see it grow by 7%.

And then if you use the same yield 10 years from now, you know, what kind of return do you have?

Well, the 10-year model says, “Here's what has to happen for you to get 100% return on your money in 10 years.”

Right now, if you grow the dividend by 4% and it yields 3% in 10 years, basically, you have a double.

One of the problems is you're not getting the dividend growth to get it there. It's really more—it's really leaning a little bit more towards stock appreciation.

The one thing that makes this story a little different: now you have a conservative company that's started to gain some traction that could turn into something pretty substantial, and that's the quantum computing piece.

This is not something that I'm sticking my neck out and saying, “Oh, you know, you gotta go all in.”

I think it's something to consider for maybe a small position. And at some point, we may go into it with more conviction.

But the real piece here is just two different long views and how that can play in as far as choices that you make in investing your money.

Which leads to the second story.

I'm gonna start with 10 years from now. Am I absolutely certain that IBM is gonna be around?

Um, not 100%, but they'll probably be around in some version.

Will the stock be worth less than it is now? It's possible. I mean, they're in high tech.

They're in a very disruptive industry, which is tech in general, and who knows?

Quantum computing may not go anywhere.

The second story, I can tell you, for me, it's like 99% confidence this company's gonna be around, and it's gonna be around basically in the same version it's in.

It just keeps pumping out cash flow, and it's probably a little bit like Philip Morris, where you've got pretty much zero sexy story.

In fact, it's very politically incorrect, but yet the cash flow is there. They keep paying shareholders, and the compounding of cash flow is a wonderful thing.

So the second long-term view is Chevron, and you're probably thinking, “Oh, okay. Well, oil's on the way out. It's gonna be a slow death.”

Well, first of all, I would argue, will the industry shrink?

Quite possibly, but you got companies like Chevron, Exxon, Phillips 66, Conoco, the really big players out there.

It's hard to see where they're going anywhere because, last I checked, people still like carpet. They don't wanna live on a dirt floor.

You wanna drive your car on concrete or asphalt. Plastics, all petroleum-based.

I mean, if you just look around where you are right now, probably most everything you can see has some impact from petroleum.

Even though energy demands might decline, there's still plenty of room for oil out there, and this one has been in our model portfolio from day one.

We continue to hold it, and before the end of the podcast, I will give you a, a little bit of a spin on it.

But I have full conviction that oil's gonna be around in 10 years, and this is one that you can buy and hold, and it's probably a little bit of a hedge.

Chevron right now has a dividend yield that is around just under four percent. It's actually a little bit below that now because, at the moment when we record this, the stock is up into the one nineties.

But it's been a dividend growth story. Last five years, dividend's grown at about six percent.

It's got a good yield, and they are very shareholder-friendly. They openly state that a dividend is a major priority.

Of course, everybody says that until it's not, but Chevron has a track record of proving that.

Now, Value Line says that revenue will grow six percent, earnings will grow six and a half percent, dividends will grow probably four and a half percent.

When you're starting at four percent, you don't need quite the same dividend growth because you've got more cash flow coming in that you can compound.

Now, one thing I will mention: oil and gas accounting is a little different. There's depletion allowances.

So if you do a quick observation of, of Chevron, first thing you're probably gonna notice is they are barely covering their dividend with earnings.

Well, that's not 100% true because of depreciation and depletion from oil and gas accounting.

Their cash flow actually runs around $20 a share. With the dividend at six eighty-four, you've got quite a bit of room to pay the dividend.

I will say, I would not just go in and buy it at any price. This thing does have headline risk.

It does trade somewhat to the price of oil. However, you know, it's well-diversified.

They go from exploring to producing to transporting crude oil and natural gas. They have downstream, which is refining, marketing.

They refine the crude. They actually sell it in fuel, whether it's gasoline, diesel, or jet fuel.

They also have chemicals. It's a very well-diversified company that continues to pay a dividend, and they grow their dividend even in 2020, when oil for a one-day period went below zero.

The stock can really handle difficult economic environments. Value Line has it rated an A++, one of the highest ratings you can have.

Debt is only 25% of equity. The company's got a strong balance sheet. They've got good reserves.

You know, another thing, when you look at the numbers, like return on invested capital, return on equity, return on assets, these numbers aren't gonna look as good, partly because these companies are asset-rich.

And you want something that can produce cash flow well out into the future, which is one reason why we call it the long-term story.

The way you do that is you have reserves in the ground, and they just bought Hess, which had a lot of reserves.

They're in the Permian Basin, which is one of the most productive assets, actually, in the world.

They are all over the globe. They've got the ability to pretty much go anywhere, and AI will be a big benefit to Chevron because it's gonna help them process data much more efficiently.

They can improve looking for oil, everything else that goes along with that.

I would also argue that Chevron is almost a direct play on AI because all these AI data centers going up, there's no way that wind or solar is going to power them.

Now, they might power them for, for periods of time, but they're gonna have to have backups, and that is pure and simple natural gas.

There's a mad dash, it appears right now, to bring nuclear back online to some degree, but that's a really long tail of how long it takes to get that back up and running.

Understand they're actually going to commission a few of them that were shut down, but natural gas is going to be in demand for the foreseeable future, and if anything, it's only going to go up.

It's really probably the cleanest petroleum energy out there.

I always like to use the example of if you have a natural gas stove on in your kitchen, you don't turn the vent on every time you turn your burners on to cook something.

Well, that's natural gas burning, and it's burning inside your house. You don't really worry about the pollution.

Not that there isn't any, but it's low enough to where it's just not a concern.

Not saying it's the best thing in the world, but even if you're really anti-oil, it just seems to make sense to me to own a little bit just because you're gonna continue to use it.

There is a derivative of natural gas that's even in some painkillers. I don't remember which one, whether it's Advil or Tylenol or which.

But even if you get a headache listening to this podcast, there you go. You need some natural gas.

You know, the market for oil is never going to completely go away.

You may be asking, “Well, why don't you own Exxon? Or why don't you own Conoco or one of the others?”

This is the one that I've been in it for more than a decade. I followed a little bit closer.

Full disclosure, I mean, do have, do own some Exxon, but Chevron is the larger one.

Exxon has been a little bit better performer in the last few years, but dividend yield is lower on Exxon.

However, I can't stress enough: never buy something just for the dividend yield.

Would I say, “Oh, this is the only reason why I own it”? No.

But it happens to be a fairly big position for Berkshire Hathaway. They own almost seven percent of it.

So Chevron's gone from the one sixties all the way back up into the one nineties.

Personally, I would look to add to it on weakness. As I mentioned, you know, it is, even though it's diversified, it is commodity-price-sensitive to oil.

It seems like it's worth waiting because headlines are just fast and furious of what's going on on that war.

You don't have to be a real economist to know nobody wants oil up long term.

It adds to inflation. It's not a political winner by a long shot.

There's some pretty strong incentives to get oil back down again.

But if you can buy it below one seventy, I think it's something that you wanna hold long term.

And we actually intend to, if the stock trades back up above two hundred, this is a little bit of a contradiction to what we usually say, but we will probably sell a small piece of it just because it would be nice to take advantage of the commodity price volatility.

But we intend to turn around and try to buy it right back if the price drops again.

And you know what? If it doesn't, we're not gonna sell that much, and it's something we wanna continue to hold.

So those are two long-term stories with a little different spin, and it's really focusing on what happens a decade from now and ways to play it.

As we wind this up, just to kinda do a quick recap here, one of 'em is really about buying something that has an option embedded in it that could have a huge payoff years down the road, and you don't pay much for it, in my view.

In addition, you've got the dividend yield. It potentially is not gonna grow by much, at least on the front end, but there is a little bit of growth to the story.

It's something that you get paid while you wait and see if the quantum computing option is actually gonna kick in.

The second one, Chevron, is just a pure, “Hey, you don't have to have a fancy story to make a lot of money,” and that's been the case with Philip Morris.

It's all about cash flow. Chevron, not quite the Philip Morris level of income, but it's still at almost 4%, and the confidence level of this story being around in the next decade is very high.

We've repeatedly said this: in the end, it's all about total return. We want dividends, we want income, but we want total return.

And I have a lot of confidence that Chevron's gonna give you a good total return.

IBM has the chance to be a tremendous winner. And if it doesn't, the downside just doesn't seem to be that great.

So it's really not looking at the next six months or even the next six years. It's going out much farther than that, something that investors never seem to do anymore.

But this is a case where the payoff could well be worth the patience of waiting.

As Charlie Munger is famous for saying, “It's not about the buying or selling, it's about the waiting.”

The problem in the world we live in today is, for most people, that definition is down to months or weeks.

If you're gonna invest for long-term growth, and dividends are a part of that, it's not weeks, it's not months, it's years.

That's where you find these companies that are up 10X, 20X from what people pay for 'em.

Not always, but most of the time, it's because they were extremely patient.

Sure, you get a few big winners, but that's not normally the case.

And I'm just gonna throw this in kinda off the wall. SpaceX came out, first trade was around, around 150, went straight to, like, 230.

Looked like, “Here's the easy money, it's a great story.”

Well, guess where SpaceX is now? Around 115.

The point to all that is, the faster you want your money to double, the more volatility you're gonna take.

That's just a general law of investing and economics.

So it really is all about patience and finding the stories or finding the investments that you have the confidence that, no matter what's going on, you have the conviction to hold them and just let them work.

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If you have any questions or anything to add to today's episode, please email Ethan, E-T-H-A-N, @growmydollar.com.

Past performance does not guarantee future results. Every investor should consider whether an investment strategy is right for them and all the risk involved.

Stocks, including dividend stocks, are volatile and can lose money.

Denewiler Capital Management may or may not have positions in the publicly traded companies mentioned herein.