Company Description: IBM global capabilities 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 two 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 2.) above. Since IBM's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 9.3% premium to its calculated fair value of $171.41. 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 two 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. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive four-year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every five years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 16 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 two of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $1,721 is below the $1,900 target I look for in a stock that has increased dividends as long as IBM has. If IBM grows its dividend at 16.0% per year, it will take 7 years to equal a MMA yielding an estimated 20-year average rate of 3.6%.
Memberships and Peers: IBM is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Accenture plc (ACN) with a 2.3% yield, Hewlett-Packard Company (HPQ) with a 1.7% yield, and Microsoft Corporation (MSFT) with a 3.0% 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 $180.41 before IBM's NPV MMA Differential increased to the $1,900 minimum that I look for in a stock with 16 years of consecutive dividend increases. At that price the stock would yield 1.6%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,900 NPV MMA Differential, the calculated rate is 16.3%. This dividend growth rate is higher than the 16.0% used in this analysis, thus providing no margin of safety. IBM has a risk rating of 1.50 which classifies it as a Low risk stock.
IBM operates in a intensely competitive environment. Its solutions, global market presence and significant economies of scale provide it a distinct advantage. Given its diversity, the company is well positioned to weather future economic storms. IBM's solutions will enable the company to deliver steady recurring revenue for a long time. However, its low yield and rich valuation will keep me on the sidelines for now.
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 held no position in IBM (0.0% of my Dividend Growth Portfolio) and was long MSFT. See a list of all my dividend growth holdings here.
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