Tuesday, 9 July 2013

A Look at IBM


I’ve been watching IBM for close to a year hoping the share price would dip below $180. Today, shares closed at $191.30, about 11% below their 52 week high of $215.90.

I would like to increase my exposure to IT, which currently amounts to 200 shares of INTC (2.8% of my portfolio).

Below is my analysis of IBM.

Average Dividend Yield Analysis*

IBM:US
Year
High Price
Low Price
1Q
div.
2Q
div.
3Q
div.
4Q
div.
Annual Dividend
High Yield
Low Yield
2001
$124.70
$83.75
$0.13
$0.14
$0.14
$0.14
$0.55
0.66%
0.44%
2002
$126.39
$54.01
$0.14
$0.15
$0.15
$0.15
$0.59
1.09%
0.47%
2003
$94.54
$73.17
$0.15
$0.16
$0.16
$0.16
$0.63
0.86%
0.67%
2004
$100.43
$90.82
$0.16
$0.18
$0.18
$0.18
$0.70
0.77%
0.70%
2005
$99.10
$71.85
$0.18
$0.20
$0.20
$0.20
$0.78
1.09%
0.79%
2006
$97.88
$72.73
$0.20
$0.30
$0.30
$0.30
$1.10
1.51%
1.12%
2007
$121.46
$88.77
$0.30
$0.40
$0.40
$0.40
$1.50
1.69%
1.23%
2008
$130.93
$69.50
$0.40
$0.50
$0.50
$0.50
$1.90
2.73%
1.45%
2009
$132.85
$81.76
$0.50
$0.55
$0.55
$0.55
$2.15
2.63%
1.62%
2010
$147.53
$116.00
$0.55
$0.65
$0.65
$0.65
$2.50
2.16%
1.69%
2011
$194.90
$145.71
$0.65
$0.75
$0.75
$0.75
$2.90
1.99%
1.49%
2012
$211.79
$177.35
$0.75
$0.85
$0.85
$0.85
$3.30
1.86%
1.56%
2013


$0.85
$0.96
$0.96
$0.96
$3.73


2014


$0.96
$0.96
$0.96
$0.96
$3.84


Stock prices are per calendar year.
12y ave
1.59%
1.10%
Dividends are recorded in the quarter they were paid.
5y ave
2.27%
1.56%







3y ave
2.00%
1.58%







5y
$168.87
$245.83







3y
$191.80
$243.00






Super Cheap
$140.46


The table shows the 3 year average dividend yield to be 2.00% ((2.16% + 1.99% + 1.86%)/3). I use the numbers in the “High Yield” column for obvious reasons.

Using the current annual dividend of $3.84, one would have to pay $191.80 for a 2.00% dividend yield.

Buying the stock at its low in 2008 would have earned you an initial yield of 2.73%. Using the current annual dividend, that corresponds to a stock price of $140.46 today (see “super cheap” price in the table above).

Graham Price

IBM’s 2010, 2011 and 2012 EPS were $11.52, $13.06 and $14.37. 3Y Ave EPS = $12.98.
IBM’s BV is $17.22.
Graham Price = SQRT (3Y Ave EPS * BV * 22.5) = $70.93

Cyclically Adjusted Price to Earnings Ratio

IBM’s 10Y Ave EPS = $8.53
CAPE = Stock Price / 10Y Ave EPS = $191.30 / $8.53 = 22.4
A CAPE below 20 is good.

Conclusion

On the positive side, 2013 and 2014 EPS are forecast at $16.69 and $18.22, respectively. Moreover, IBM’s dividend payout ratio is relatively low at 27%.

On the not so positive side, ADY and CAPE indicate that IBM is slightly overvalued.


*My method is not perfect as the stocks low price may have occurred before the annual dividend increase.

3 comments:

  1. ADY - I like the company, and know quite a few people who have worked there (some liked it, some hated it - like any other company).
    From an investment perspective the yield has just never been enough for me to jump in. No denying it is a marker leader however.
    For now Microsoft is enough tech for me. I suspect if I make another buy in that sector it will be Intel.

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    Replies
    1. Hey DoD,

      Funny you mention low yield. Just this week I contemplated selling EMP.A because of its low dividend yield. And then I looked at what I would like to buy...and they too had low yields (e.g. NOV and IBM). I don't mind low initial yields, as long as the dividend grows rapidly, which has not been the case with Empire. After reflection, EMP.A is a well managed growth stock and I will be patient for yet another year.

      I considered MSFT when it was trading in the $26 range. Another missed opportunity I reckon.

      Take care.

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