Linked here is a PDF copy of my detailed analysis of International Business Machines Corp. (IBM). Below are some highlights from the above linked analysis:
Company Description: IBM, the world’s largest technology company, offers a diversified line of computer hardware equipment, application and system software, and related services.
Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:
- Avg. High Yield Price
- 20-Year DCF Price
- Avg. P/E Price
- Graham Number
IBM is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuations and average the remaining two, IBM is trading at a 15.4% discount. IBM earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
- Rolling 4-yr Div. > 15%
- Dividend Growth Rate
- Years of Div. Growth
- 1-Yr. > 5-Yr Growth
- Payout 15% of avg.
IBM earned one Star in this section for 3.) above. IBM has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 13 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
- NPV MMA Diff.
- Years to >MMA
IBM earned no Stars in this section. The NPV MMA Diff. of the $6,328 is below the $7,500 minimum I look for in a stock that has increased dividends as long as IBM has. If IBM grows its dividend at 14.7% per year, it will take 10 years to equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.
Other: IBM is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. IBM should benefit from strong revenue growth in emerging markets, improved margins from cost cutting measures and profitability in mature markets. Risks include pricing pressure and managing a transition to new hardware products.
Conclusion: IBM earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a net total of two Stars. This quantitatively ranks IBM as a 2 Star-Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to drop to $81.57 for IBM’s NPV MMA Differential to be around the $7,500 that I like to see. At that price the stock would yield 2.33%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the $7,500 NPV MMA Differential I’m looking for, the calculated rate is 15.3%. This dividend growth rate is only slightly above the 14.7% used in this analysis.
Since IBM is trading below my calculated fair value of $101.95, it could be considered as a value play. However, if I were interested purchasing IBM, I would wait for a price below $81.57.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I had no position in IBM (0.0% of my Income Portfolio) .
What are your thoughts on IBM?