Lou Gerstner wrote, "People truly do what you inspect, not what you expect." … Lest we forget, these "inspection pages" exist because chief executives are "people" too.
Arvind Krishna: 2020-23 Shareholder Returns and Risk
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Date Published: April 11, 2022
Date Modified: April 16, 2024 |
Arvind Krishna's 2020-23 Shareholder Returns and Risk
- Evaluating Arvind Krishna's 2020-23 Shareholder Returns
- IBM Shareholder Trust and Transparency
- Arvind Krishna's 2020-23 Shareholder Returns
- Evaluating Arvind Krishna's 2020-23 Shareholder Risk
- Arvind Krishna's 2020-23 Shareholder Risk
Evaluating Arvind Krishna's 2020-23 Shareholder Returns
What were Arvind Krishna's four-year shareholder total returns from 2020 to 2023—including dividends? IBM stock—including dividends—was up 11.25% over the four-years while the Dow Jones Industrial Average (DJIA) was up 9.45%, an investment in a large company stock index fund was up 12.04%, and the same investment in the Dow Jones Technology Index would have yielded 21.58%. Stock investors could have received higher and at times, almost spectacular returns with less risk in indexed mutual funds.
Unfortunately, to discover this information, an IBM shareholder still has to turn to the very last few pages of IBM's124-page Annual Report--a tradition started by the Samuel J. Palmisano's team in his 2006 Annual Report. Although, the government requires this comparison chart, there must be no legal requirements on how "visible" this information must be for an investor.
Maybe, if IBM outperforms the S & P 500 or S & P Information Technology indexes, instead of vice versa, it will show up on the front page. Until then shareholders can just avoid reading the opening dissertation and get to the important one-year, three-year, and five-year shareholder returns on the IBM annual report's last page.
Unfortunately, to discover this information, an IBM shareholder still has to turn to the very last few pages of IBM's124-page Annual Report--a tradition started by the Samuel J. Palmisano's team in his 2006 Annual Report. Although, the government requires this comparison chart, there must be no legal requirements on how "visible" this information must be for an investor.
Maybe, if IBM outperforms the S & P 500 or S & P Information Technology indexes, instead of vice versa, it will show up on the front page. Until then shareholders can just avoid reading the opening dissertation and get to the important one-year, three-year, and five-year shareholder returns on the IBM annual report's last page.
IBM Shareholder Trust and Transparency
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The IBM Chairman’s 2023 letter to "IBM Investor” covered:
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IBM's highlighted its five-year returns for an investment of $100.00 in its 2023 Annual Report on page 122 of 124:
S&P IT Index: $329.73: S&P 500: $207.21; IBM Stock: $193.63 |
This information is required by law, and it documents the corporation’s underperformance from 2018 to 2023. It shows a shareholder’s return on a $100 dollar investment in IBM common stock with all dividends reinvested. IBM's returns are the bottom-most, solid blue flat line. In 2023, this chart was on page 122 of the company's 124-page report. . . . as far from the opening letter on pages 1 through 4 entitled "Dear IBM Investor" as possible. In 2021, this chart was on page 136 of the company’s 144-page annual report. So this is an on-going tradition, not a mistake.
This is the equivalent of a salesman withholding his end-of-year attainment to the last chart in a hundred-chart PowerPoint presentation—only revealing that he or she failed to make quota after their management team had fallen into a deep stupor of boredom. This is not good form from a corporation that claims it can be trusted to be transparent, and that it wants to build confidence in its leadership and their ethical standards.
This is the case of a chairman discussing "what" he or she is doing and not documenting if what he or she is doing is "actually working." Great leaders of great corporations address their issues front and center. They do not bury them in the last pages of annual reports.
Below are charts covering the shareholder returns as compared with some key industry benchmarks for the Krishna era (2020-23), the Krishna-Rometty era (2012-2023), and the Krishna-Rometty-Palmisano-Gerstner era (1999 through 2023).
Arvind Krishna's 2020-23 Shareholder Returns
- Arvind Krishna 2020-23 Shareholder Returns: Compound Annual Growth Rate (CAGR)
- A $1,000 investment in IBM at the end of 2019 yielded a 11.25% CAGR.
- A similar investment in the Dow Jones Industrial Average yielded a 9.45% CAGR.
- A similar investment in a Large Company Index fund yielded a 12.04% CAGR.
- A similar investment in a Dow Jones Technology Stock Index fund yielded a 21.58% CAGR.
A critical insight: through 2022, an investment in any of these other funds would have performed better than IBM
- Krishna & Rometty 2011–23 Shareholder Returns
- A $1,000 investment in IBM at the end of 2011 yielded a 3.19% CAGR.
- A similar investment in the Dow Jones Industrial average yielded a 12.45% CAGR.
- A similar investment in a Large Company Index fund yielded a 13.93% CAGR.
A critical insight: through 2023, an investment in any of these other funds would have performed better than IBM
- Krishna, Rometty, Palmisano & Gerstner 1999–2023 Shareholder Returns:
- A $1,000 investment in IBM at the end of 1998 yielded a 4.98% CAGR.
- A similar investment in a Large Company Index fund yielded a 7.56% CAGR.
- A similar investment in the Dow Jones Industrial average yielded a 8.28% CAGR.
- Generally speaking, in the first decade IBM underperformed index funds but at least achieved positive returns until Virginia (Ginni) M. Rometty took charge, then the stock consistently underperformed lower-risk, index investments mostly returning negative numbers.
A critical insight: IBM as a "Dividend Aristocrat" still underperformed these indexes based on total returns—which includes dividends, in 20 out of the last 25 years.
Evaluating Arvind Krishna's 2020-23 Shareholder Risk
An intangible asset is something that, if dropped on your toe, doesn’t leave a mark. It is ethereal, and its value is open to personal interpretation, imagination, and creative thinking. For the purposes of this article, intangible assets are presented in two ways: first, the goodwill that arises directly from an acquisition; and second, all other intangible assets—patents, brand image, customer relations, non-binding contracts, strategic alliances, or others (as identified from IBM's Annual Reports).
In the 20th Century, great chief executive officers like Thomas J. Watson Sr., the traditional founder of IBM, believed that goodwill was a bad asset to carry on a corporation's books because essentially, if/when a company failed there were really no tangible assets behind this intangible asset and the dollars that represented it on the books. It was a hidden risk that most shareholders failed to understand—unless the company filed for bankruptcy.
It took Thomas J. Watson Sr. his entire forty-two year career at IBM (1914 through 1956) to decrease the amount of goodwill to zero that Charles Randall Flint's "creative thinking" assigned to the corporation when he merged several companies together to form the C-T-R Company in 1911. A lessor chief executive would have probably just ignored the valueless asset, but not Tom Watson. He immediately went to work to get it off the books.
As the chart below shows, it took forty-two years to reduce this worthless asset to its true book value—zero.
As the chart below shows, it took forty-two years to reduce this worthless asset to its true book value—zero.
The line graph above displays how far back into the past (1925) a researcher must dig to find a point in time when the corporation held a similar percentage of goodwill on its books as it did in 2023. This was around the time that the C-T-R Company was renamed International Business Machines. In the 20th Century, it took Tom Watson Sr. forty-two years to drive goodwill to zero, but the successor chief executive officers kept it there until 2001.
In the 21st Century, goodwill is the difference between the full amount paid for an acquisition less all other tangible and intangible assets. As a real-time example from IBM's Annual Reports, IBM documented in its 2003 Annual Report the 2002 acquisition of PricewaterhouseCoopers Consulting (PwCC) for $3.89 billion. Of the purchase price, IBM estimated that PwCC had $.32 billion in tangible assets (current and fixed assets of value such as chairs, desks, computers, buildings, etc. less current and non-current liabilities), and $.41 billion in “other” intangible assets (strategic alliances, client relationships, and customer contracts). The remaining $3.16 billion—81% of the purchase price—was listed as goodwill: specifically, what IBM wrote in its annual report was the value to be acquired from "the assembled workforce, synergies gained from combining PwCC and IBM, and the premium paid to gain control" of the company.
Of the $99.2 billion paid for its 224 acquisitions since 2001 and the resulting goodwill of $70.3 billion, $60.2 billion is still carried today (end of 2023) as goodwill—more than 60% of all acquisition dollars. This goodwill carries no inherent value and, in a worst-case scenario such as bankruptcy, it would have little or no monetary value for shareholders. Therefore, an increasing percentage of goodwill increases shareholder risk.
The following charts start in 2001 because that is when an accounting change was made that allows a 21st Century corporation to carry such goodwill … effectively forever.
Of the $99.2 billion paid for its 224 acquisitions since 2001 and the resulting goodwill of $70.3 billion, $60.2 billion is still carried today (end of 2023) as goodwill—more than 60% of all acquisition dollars. This goodwill carries no inherent value and, in a worst-case scenario such as bankruptcy, it would have little or no monetary value for shareholders. Therefore, an increasing percentage of goodwill increases shareholder risk.
The following charts start in 2001 because that is when an accounting change was made that allows a 21st Century corporation to carry such goodwill … effectively forever.
Arvind Krishna's 2020-23 Shareholder Risk
- Arvind Krishna's 2020-23 Shareholder Risk
- Shareholder Risk increased in 2021 as intangible assets surpassed a benchmark 50% of total assets because of the Kyndryl divestiture—52% in the chart below reflects the appropriate percentage. Since then, the percentage of intangible assets has remained in the 52-53% range.
- Krishna & Rometty 2011–23 Shareholder Risk
- From 2011 through 2023, the percentage of goodwill + other intangible assets rose from 25% to 53%, The Red Hat acquisition resulted in a large increase not only in goodwill but in all other intangible assets which grew from its decade-long $3 billion to over $15 billion.
- Krishna, Rometty, Palmisano & Gerstner 2001–23 Shareholder Risk:
- Goodwill accumulated through 224 acquisitions at a total cost of $99.2 billion drove shareholder equity less goodwill into the red in 2008 and continuously lower since, by constantly increasing goodwill and other intangible assets.
- Krishna, Rometty, Palmisano, & Gerstner 2001–23 Shareholder Risk:
- The following chart documents the continuous growth of goodwill (bar chart) since 2001 and goodwill's percentage of total assets (line graph) which, by itself, has now reached 45%.
