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International Business Machines Corp. (IBM) Dividend Stock Analysis

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April 11, 2013 – Comments (0) | RELATED TICKERS: IBM , HPQ , MSFT

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 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 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 premium to all four valuations above. Since IBM's tangible book value is not meaningful, a Graham number can not be calculated. The stock is trading at a 160.3% premium to its calculated fair value of $81.94. 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 one Star in this section for 1.) 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. The company has paid a cash dividend to shareholders every year since 1916 and has increased its dividend payments for 18 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 negative NPV MMA Diff. means that on a NPV basis the dividend earnings from an investment in IBM would be less than a similar amount invested in MMA earning a 20-year average rate of 2.54%. If IBM grows its dividend at 3.0% per year, it will never equal a MMA yielding an estimated 20-year average rate of 2.54%.

Memberships and Peers: IBM is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: Accenture plc (ACN) with a 2.2% yield, Hewlett-Packard Company (HPQ) with a 2.3% yield, and Microsoft Corporation (MSFT) with a 3.3% yield.

Conclusion: IBM did not earn any Stars 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 total of one Star. This quantitatively ranks IBM as a 1-Star Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $63.03 before IBM's NPV MMA Differential decreased to the $1,700 minimum that I look for in a stock with 18 years of consecutive dividend increases. At that price the stock would yield 5.4%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,700 NPV MMA Differential, the calculated rate is 14.5%. This dividend growth rate is well above the 3.0% 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, operates in a intensely competitive environment. Its solutions, global market presence and significant economies of scale provide a unrivaled advantage over its competitors. Given its diversity, the company is well positioned to weather future economic storms. At the time of this analysis, the company had not declared its 2013 dividend increase (expected in late April), thus its calculated fair value of $81.94 is significantly below its current price. However, its sub-2% yield is what is keeping me on the sidelines.

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 in MSFT. See a list of all my dividend growth holdings here.

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