Sunday, July 13, 2014

Recent Buy: IBM

Jul 11, 2014: Bought 14 shares of IBM at $187.91 per share.

Incorporated in 1911 and headquartered in Armonk, New York, International Business Machines (IBM) is an information technology company engaged in the development and manufacturing of advanced computer systems, software, storage systems and microelectronics.

IBM is a Dividend Contender with a streak of 19 years of dividend increases. It pays quarterly dividends in March, June, September and December. The current dividend is $1.10 per share, so starting yield on cost is 2.34%. IBM's 5-year dividend growth rate is a solid 14.26%.

With a 5-year Beta averaging 0.73, IBM's share price has performed reasonably well over the past 10 years, out-gaining the S&P 500 by a healthy margin:

Analysis of IBM

My fair value estimate of IBM is $204.00, so I picked up shares at a discount of 8.27%. The following table provides some key statistics, with highlighted values relating directly to my selection criteria.

IBM easily meets the requirements of the Chowder Dividend Rule, which requires that the sum of a stock's dividend yield and its 5-year dividend growth rate exceed 12%. For IBM, the sum is 16.69%. Additionally, IBM has an EPS payout ratio of 30.01%, well below the required 40% level.

IBM misses out on the following criterium:
  • Debt to equity ratio less than 0.50 (2.65)
Based on these statistics, IBM earns 5 out of a possible 7 stars: (*******)

The following chart shows IBM dividend payments and earnings per share over the last 10 years. IBM has grown its dividend steadily and the EPS growth similarly is trending up:

Other ratings for IBM

 Zacks Rank  4-Sell
 S&P Capital IQ's Stock Report (*****) Hold
 Thomson Reuters StockReport+   (6/10) Neutral 
 MorningStar Rating (*****)
 The Motley Fool's CAPS Rating  (*****)

Concluding Remarks

IBM is the top candidate in the Information Technology sector on my July dashboard of dividend growth candidates. This is my 3rd Information Technology holding in DivGro, along with INTC and MSFT. I don't plan to add any more stocks in the Information Technology sector.

IBM reported disappointing revenues in the first quarter of 2014, although earnings per share were in line with expectations. EPS declined by 15% from the year-ago quarter, due to a lower revenue base and a significant increase in total operating expenses. IBM faces faltering hardware sales, sluggish IT spending and challenges in emerging markets, especially in China.

On the other hand, IBM remains a highly profitable company that generates a lot of free cash flow. It has been returning cash to shareholders for many years. Since 2000, IBM has returned about $138b to stakeholders in the form of dividends and share buybacks.

IBM is focussing on growth in high-value segments, particularly software, which is expected to drive overall growth in 2014 and beyond. The newly launched Watson group has significant growth opportunities, which, along with initiatives in big data and business analytics, cloud computing, smarter planet, mobile, security and social business, are expected to help IBM achieve an earnings target of $20.00 per share by fiscal 2015.

IBM has an impressive foundation of intellectual property on which to base innovative products and services. The company has secured the most U.S. patents for 21 years in a row, with 6,809 patents being awarded in 2014, a new annual record. The latest patents underscore the type of markets IBM is trying to enter. One invention allows Watson, IBM's cognitive technology that can analyze vast amounts of data and answer questions posed in English, to better assess questions and determine confidence in the accuracy of an answer. IBM generates about $1 billion a year in licensing revenue from its patents portfolio.

14 shares of IBM adds $61.60 of expected dividend income, increasing DivGro's projected annual dividend income to $4,451.12.

IBM is the 32nd holding in DivGro.

Full Disclosure: Long INTC, MSFT

Thanks for reading! IBM is one of the most popular holdings among dividend growth investment bloggers. Do you own IBM, or are you planning on buying shares soon? 


  1. I've been looking at IBM but since it popped a week or so ago I'm not sure if I'll be adding any. Been trying to add some in the $180 range. I like IBM and think there's still plenty of room for continued dividend growth but eventually revenue and net income will have to actually increase for this to be a solid long term holding. But there's enough room to keep increasing the dividend without that growth and to buy time for IBM to figure out their next move.

    1. Thanks, Passive IncomePursuit -- that's a good perspective! In my view, IBM is just too big not to figure things out, so I'm happy to invest here at a discount of about 8% to fair value. I agree, though, it would have been nice to get it before it popped...

      Take care!

  2. Love the buy...great streak, payout ratio and P/E. Yield is not great but decent nevertheless.

    I have been watching IBM lately and patiently waiting for a small dip to buy into but the reverse seems to be happening so the boat may have left without me on this one. :(

    1. Agreed that the yield is not great, but IBM is a solid company and dominant in its sector. My fair value estimate is $204. I think you're not too late to the party... On the other hand, you may have a chance to jump in soon if the market corrects a little.


  3. From reading several of the dividend bloggers out there not too many have their eyes on IBM. Still it has a great history and they have adapted really well from a computer company to a software and services business. Great PE and nice dividend history should make this a long term buy. Thanks for sharing your purchase.

    1. Hi DivHut -- actually, IBM is one of the popular holdings of dividend growth investors (check out my post earlier this year, which is linked from "most popular holdings" at the bottom of my post. Perhaps IBM is not a candidate of choice among bloggers right now (for new cash), but I think I got in at a good discount!

      Take Care!


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