Monday, June 20, 2016

International Business Machines Corp. (IBM) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of International Business Machines Corp. (IBM). Below are some highlights from the above linked analysis:

Company Description: IBM's global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

IBM is trading at a discount to 1.) and 3.) above. Since IBM's tangible book value is not meaningful, a Graham number can not be calculated. When also considering the NPV MMA Differential, the stock is trading at a 15.3% discount to its calculated fair value of $179.46. IBM earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

IBM earned two Stars in this section for 1.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. IBM earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 21 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) or Treasury bond? 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:

1. NPV MMA Diff.
2. Years to > MMA

IBM earned a Star in this section for its NPV MMA Diff. of the $2,289. This amount is in excess of the $1,400 target I look for in a stock that has increased dividends as long as IBM has. The stock's current yield of 3.68% exceeds the 2.19% estimated 20-year average MMA rate.

Peers: The company's peer group includes: Accenture plc (ACN) with a 1.9% yield, Hewlett-Packard Company (HPQ) with a 3.8% yield, and Microsoft Corporation (MSFT) with a 2.9% yield.

Conclusion: IBM earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks IBM as a 4-Star Strong stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $190.73 before IBM's NPV MMA Differential decreased to the $1,400 minimum that I look for in a stock with 21 years of consecutive dividend increases. At that price the stock would yield 2.9%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,400 NPV MMA Differential, the calculated rate is 5.5%. This dividend growth rate is below the 7.7% used in this analysis, thus providing a margin of safety. IBM has a risk rating of 1.75 which classifies it as a Medium risk stock.

IBM, an industry leader in enterprise software, services and hardware, operates in a intensely competitive environment. Its solutions, global market presence and significant economies of scale provide a unrivaled advantage over its competitors. The company is in the process of repositioning its business with a focus on initiatives like analytics and cloud computing. Sales gains in the new operations should offset those lost in legacy core businesses.

As a dividend growth stock, IBM has enjoyed double-digit dividend increases the last 7 years. Its Debt to total Capital increased to 75% from the last of 38%, well above my desired maximum of 45%, but its Free Cash flow Payout of 37% is below my desired maximum of 60%. The stock is currently trading at a discount to my calculated fair value of $179.46. I will continue to look for opportunities to add to my position.

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 was long IBM in my High Dividend Growth Portfolio. (14.9% of my High Dividend Growth Portfolio), and was long in MSFT. See a list of all my Dividend Growth Portfolio holdings here.

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