04-29-2014, 09:53 PM
(12-13-2013, 06:58 PM)Kerim Wrote: I’m not that familiar with IBM, so I can’t speak about its moat or competitive advantages. I just ran it through my screen, though (it had not been on my watch list previously), so I can share what I see in the numbers.
IBM has raised its dividend for 18 years in a row now, giving it a very healthy dividend streak. Seems like the default raise lately is 40 cents each year, except for smaller raises in 2008 and 2009, for obvious reasons. The five-year dividend growth rate is very solid, around 14 percent, but by raising the dividend the same amount every year, the percentage increase will naturally decline. The raise from 2012 to 2013 was just over 12 percent. If they raise by another 40 cents in 2014, that will represent an increase of 10.8 percent.
The payout ratio is a nice low 25 percent, so there is plenty of room to accommodate the growing dividend, and perhaps even increase the dividend growth rate back up a bit.
IBM’s earnings per share for the last 5 or six years have increased very steadily. Almost suspiciously steadily, really, with double-digit increases from $7.15 in 2007 to $14.37 in 2012 (using GAAP numbers). Earnings increased steadily through the 2008 and 2009 turmoil. 2013 earnings look like they will beat 2012, but by a smaller margin than in recent years, and it might be the first earnings increase of less than 10 percent in quite some time.
At prices in the low to mid $170s per share, the P/E ratio is low, around 12. This is the lowest the P/E has gotten since some time in 2010.
If you like a high current dividend yield, that is perhaps the weak link in the chain of this story. At today’s prices you are looking at a yield of about 2.19 percent. Not too exciting, but also worth noting that this is the highest the yield has been since 2010. This might suggest a good entry point if you think the company’s earnings prospects going forward are fine.
I’d also love to hear from anyone who has some insight into the company’s moat and competitive advantages. If the story is good and suggest continued health and earnings growth, the numbers certainly support IBM as an excellent dividend growth prospect.
With IBM's very healthy dividend raise, I thought this would be a good moment to revisit the stock. Just about everything that I mentioned in the post above (from December) still holds true. In fact, the picture has even improved. The dividend raise, from 95 cents per quarter to $1.10 is larger than in recent years, working out to about a 15 percent raise on an annual basis. This is higher than the five-year average raise of a little over 14 percent. So rather than slowing down, the dividend growth rate is actually increased with this latest.
Even with the dividend raise, the payout ratio is still a very low 25 percent, as a result of the continued earnings per share increase. The EPS growth rate had slowed considerably in 2012 and 2013, but forecasts for 2014 show another big leap, to "at least" $17 per share, if guidance can be believed.
The dividend yield is still underwhelming, at about 2.25 percent at today's prices. But this may not be such a negative, given the strong earnings movement and dividend growth rate. Even with the price increase (it was in the mid $170s in December, and now sits at about $195), the P/E ratio is only around 13. That is a comfortable number, though with all of the big tech names in that ballpark, I'd hesitate to call it seriously undervalued. Still, with the P/Es of many favorite dividend growth companies at or above 20 these days, the tech multiples may be especially appealing.
When we discussed IBM last, several folks expressed concern that even though EPS growth was solid, it came mostly as a result of buybacks and that revenue growth was stalled. I just pulled the following revenue numbers from the 2013 Annual Report:
2009 $95.8 billion
2010 $99.9 billion
2011 $106.9 billion
2012 $104.5 billion
2013 $99.8 billion
$100 billion in revenue is nothing to sneeze at, but this one snapshot does suggest that revenues are moving in the wrong direction. I did not see a full year 2014 revenue number in the guidance, and the EPS guidance does leave room to conclude that the buyback is allowing them to make and achieve specific EPS targets. So I guess this is a reason to be cautious, even though otherwise things look rosy.
What do you guys think?