International Business Machines Corp.

INTERNATIONAL BUSINESS MACHINES CORP., $125.50, New York symbol IBM, is our Stock of the Year for 2010. IBM is the world’s largest computer company, with operations in over 170 countries. It specializes in making large mainframe computers for business and government clients. However, the key to its appeal is that it is shifting from manufacturing to designing computer systems and managing them on behalf of its clients. IBM gets dependable revenue streams from the resulting long-term maintenance contracts....

GENERAL ELECTRIC CO., $16.20, New York symbol GE, will pay Vivendi SA of France $5.8 billion for the 20% of NBC Universal that it doesn’t already own. The company will then merge NBC Universal with cable stations and regional sports networks owned by cable operator Comcast Corp. (Nasdaq symbol CMCSA). GE will retain 49% of the joint venture, and receive about $8 billion. To put these figures in context, GE earned $2.5 billion, or $0.22 a share, in the three months ended September 30, 2009. The deal should close by September 2010. Selling control of NBC Universal will let GE focus on its main industrial businesses. These include manufacturing aircraft engines and power-station equipment. The move also lowers GE’s exposure to falling television advertising revenue. However, the company’s financial division, which accounts for a third of its revenue, continues to struggle....

INTERNATIONAL BUSINESS MACHINES CORP. $122 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.3 billion; Market cap: $158.6 billion; Price-to-sales ratio: 1.7; WSSF Rating: Above Average) is looking to increase its software sales to businesses with a new suite of programs that use the free Linux operating system. Many businesses put off upgrading their computers when Microsoft launched Windows Vista in 2007. IBM hopes to convince these customers to use its cheaper software instead of upgrading to Microsoft’s new Windows 7 operating system. Linux has been slow to catch on due to compatibility issues with certain software. But IBM’s backing should help offset these concerns. IBM is a buy.

XEROX CORP., $7.32, New York symbol XRX, fell 7% this week after it agreed to buy Dallas-based Affiliated Computer Services Inc. (New York symbol ACS). That’s because investors fear the company is paying too much for this business. ACS sells computer-outsourcing services to large corporations and government agencies. The company helps these clients focus on their main businesses by automating routine functions, such as accounting and buying supplies. Xerox is paying $5.3 billion in cash and shares for ACS, based on Xerox’s current share price. That’s equal to 83% of Xerox’s market cap....

INTERNATIONAL BUSINESS MACHINES CORP., $117.93, New York symbol IBM, announced this week that it will buy SPSS Inc. (Nasdaq symbol SPSS). Chicago-based SPSS makes software that analyzes sales and other data. This helps its clients predict how their customers will react to such things as price changes and new advertising campaigns. IBM will pay $1.2 billion for SPSS when the deal closes later this year. To put the purchase price in context, IBM earned $3.1 billion, or $2.32 a share, in the three months ended June 30, 2009. That’s up 12.2% from $2.8 billion, or $1.97 a share, a year earlier. Revenue fell 13.3%, to $23.25 billion from $26.8 billion. IBM gets 65% of its revenue from overseas markets, and the high U.S. dollar hurts the value of their contribution. However, IBM gets roughly 80% of its revenue from selling computer services and software. These generate higher profit margins than computer hardware. That’s why its earnings rose despite the lower revenue....

Growth by acquisition is a risky strategy, but wisely chosen takeovers can bring big gains. Here are two that make sense to us. INTERNATIONAL BUSINESS MACHINES CORP. $117 (New York symbol IBM; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 1.3 billion; Market cap: $152.1 billion; Price-to-sales ratio: 1.6; WSSF Rating: Above Average) will buy SPSS Inc. (Nasdaq symbol SPSS), whose software helps companies predict changes in customer buying habits and other trends. The price is $1.2 billion, or about 39% of IBM’s second quarter 2009 earnings. IBM is a buy....

Generally speaking, Canadians can’t buy units of mutual funds registered in the U.S., because they aren’t registered with provincial securities commissions for sale in Canada. For that matter, some Canadian funds are not available in all provinces. Canadians can’t buy Vanguard index mutual funds. They can, however, buy Vanguard ETFs listed on stock exchanges. Vanguard Dividend Appreciation ETF, $39.29, symbol VIG on New York, tracks an index of about 200 stocks screened for a history of rising dividends. The top holdings are currently Wal-Mart Stores, International Business Machines, The Coca-Cola Co., PepsiCo, Chevron Corp., Johnson & Johnson, McDonald’s Corp., Abbott Laboratories, ExxonMobil and Procter & Gamble. Vanguard Dividend Appreciation ETF’s MER is 0.28%, and it has a dividend yield of 2.8%. Vanguard Dividend Appreciation ETF is okay to hold....

VERIZON COMMUNICATIONS INC., $30.55, New York symbol VZ, reported this week that its revenue rose 11.6% in the three months ended March 31, 2009, to $26.6 billion from $23.8 billion a year earlier. This beat analysts’ forecasts of $26.3 billion. Most of this gain is the result of last January’s purchase of Alltel Corp., which sells wireless services mainly in the rural parts of 34 U.S. states. If you assume that Verizon acquired Alltel on January 1, 2008, Verizon’s revenue would have risen 3.3%. Verizon’s earnings gained 2.9%, to $1.8 billion from $1.7 billion a year earlier. Earnings per share rose 3.3%, to $0.63 from $0.61 on fewer shares outstanding. These figures exclude the cost of integrating Alltel....

WELLS FARGO & CO., $19.61, New York symbol WFC, jumped over 30% on Thursday after it reported that it expects to post first-quarter earnings of $3 billion, or $0.55 a share. This is more than double the consensus forecast of $0.26 a share. Wells Fargo said the higher earnings were driven by strong growth at its traditional banking services and improved results at its investment-banking division. It also reported that residential mortgage applications rose 64% from the year-earlier quarter. Part of this gain was caused by Wells Fargo’s purchase of Wachovia Corp. earlier this year. Wells Fargo has already written down most of Wachovia’s troubled loans and securities, and is doing a good job of integrating Wachovia’s operations into its own....

INTERNATIONAL BUSINESS MACHINES CORP., $92.51, New York symbol IBM, is in talks to buy computer-hardware maker Sun Microsystems Inc. (Nasdaq symbol JAVA). The rumoured $6.5-billion price is roughly double Sun’s market cap before the news became public. This would be a big purchase for IBM, which earned $12.3 billion, or $8.93 a share, in 2008. Sun’s appeal justifies the high price, and it’s a good fit with IBM. Both IBM and Sun make computer servers for governments and big corporations, so IBM would cut its costs and increase its market share by purchasing Sun. (IBM has about 30% of the server market, and Sun would push this up to 40%.) The move would also help IBM compete with Cisco Systems Inc., which plans to enter the server business. In addition, Sun’s software expertise and its widely used Java programming language would enhance IBM’s web-based services....