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 only 1.) 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 54.1% premium to its calculated fair value of $104.09. IBM did not earn any Stars in this section.
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 22 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
The NPV MMA Diff. of the $388 is below the $1,300 target I look for in a stock that has increased dividends as long as IBM has. The stock's current yield of 3.49% exceeds the 2.71% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Accenture plc (ACN) with a 2.0% yield, Hewlett-Packard Company (HPQ) with a 2.9% yield, and Microsoft Corporation (MSFT) with a 2.4% yield.
Conclusion: IBM did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a 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 decrease to $101.73 before IBM's NPV MMA Differential increased to the $1,300 minimum that I look for in a stock with 22 years of consecutive dividend increases. At that price the stock would yield 5.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,300 NPV MMA Differential, the calculated rate is 6.4%. This dividend growth rate is below the 1.8% used in this analysis, thus providing no margin of safety. IBM has a risk rating of 2.00 which classifies it as a Medium risk stock.
IBM, an industry leader in enterprise software, services and hardware, operating 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 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.
IBM's Debt to total Capital improved slightly to 70% from 71%, but is still well above my desired maximum of 45%. Its Free Cash flow Payout of 42%, up from 37%, is well below my desired maximum of 60%. The stock is currently trading at a premium to my calculated fair value of $104.09 I will wait for IBM's valuation and dividend metrics to improve before adding 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. (8.2% 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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Tags: IBM, ACN, HPQ, MSFT,