I’m going to take a look at the Dow Jones Industrial Average 30 stocks over the next few weeks that I’ve never examined. Today I take a look at IBM. Their dividend is unremarkable, the stock price is too high, and the balance sheet is weak. To see how I came to that conclusion read on.
International Business Machines (IBM)
Price: $207.08 (last week)
Shares: 1.15 billion
Market capitalization: $238.86 billion
What does the company do: IBM is one of the largest information technology companies with an array of offerings, including system hardware, infrastructure software, outsourcing, and systems integration services. The firm has operations in more than 170 countries and generates about 65% of revenue from abroad.
Morningstar’s take: IBM's technological leadership and sticky products and services will enable the company to deliver steady recurring revenue for a long time.
Bonds: $27.5 billion outstanding
Times interest earned: There are a multitude of bonds coming due between now and 2019. These bonds are not a threat to the dividend. IBM paid $411 million in interest expenses in 2011. The company earned $15.885 billion in 2011. This means that IBM earned its interest expenses by 38.6 times.
Preferred stock: none
DIVIDEND RECORD: IBM cut its quarterly dividend of $0.30 per share down to $0.14 for the 1st and 2nd quarters of 1993. Then they cut the dividend further down to $0.06 in the 3rd quarter of 1993. They have grown the dividend to $0.75 per share over the next 19 years.
Dividend: $0.75 quarterly
Dividend yield: 1.5% ($3.00 annual dividend / $207.08 share price)
Dividend payout: 22% ($3.00 / $13.41 EPS in 2011) –OR- 28.7% ($3.00 / $10.47 average adjusted earning power)
EARNING POWER: $10.47 @ 1.150 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $4.87 | $7,934 M | 1,628 M | $6.90 |
2006 | $6.11 | $9,492 M | 1,554 M | $8.25 |
2007 | $7.18 | $10,418 M | 1,451 M | $9.06 |
2008 | $8.89 | $12,334 M | 1,388 M | $10.73 |
2009 | $10.01 | $13,425 M | 1,341 M | $11.67 |
2010 | $11.52 | $14,833 M | 1,287 M | $12.90 |
2011 | $13.06 | $15,855 M | 1,214 M | $13.79 |
Seven year average adjusted earnings per share is $10.47
Consider contrarian buying below $83.76 (8 times average adjusted EPS)
Consider value buying below $125.64 (12 times average adjusted EPS)
Consider speculative selling above $209.40 (20 times average adjusted EPS)
IBM (IBM) is currently trading at 19.8 times average adjusted EPS. This is stock is so close to speculatively pricing that I’m going to call it speculative pricing.
BALANCE SHEET – More red (liabilities) than green (shareholder equity) coupled with declining assets is never a strong balance sheet.
Book value per share: $17.51 ($20,138 M shareholder equity / 1,150 million shares)
Price to book value ratio: 11.8 (under 1.0 is good) IBM investors are paying $11.80 for each $1.00 in book value. That is a huge premium to book value that a conservative business man would never pay for a non-public company.
Tangible book value per share: N/A (IBM had $20,138 M in shareholder equity less $26,213 M in goodwill and $3,392 M in intangibles leaving a negative tangible book value per share)
Price to tangible book value: N/A
Current ratio: 1.21 latest quarter (over 2.0 is good) IBM had $50,928 M in current assets at the end of 2011 and $42,123 M in current liabilities.
Quick ratio: 0.28 latest quarter (over 1.0 is good) IBM had only $11,922 M in cash or equivalents at the end of 2001 and $42,123 M in current liabilities. I’m surprised how little cash they had onhand given all the claims the financial press have written accusing corporation of hoarding cash.
Debt to equity ratio: 1.24 (lower is better) You can see a lot of red (total liabilities) relative to green (shareholder equity) on the balance sheet graphic above.
Percentage of total assets in plant, property, and equipment: 12% (the higher the better) IBM had 42% in current assets, 27% in intangibles, and other long term assets 19%.
Working capital trend: slightly positive.
CONCLUSION – IBM bottomed at $75 in November 2008 at 7.2 times average adjusted earnings. It has climbed to almost 20 times average adjusted earnings since then. IBM’s dividend yield of 1.5% is unremarkable Its actually lower than the S&P500 average of 2.2%. The company has been buying back shares the past seven years which could have been used to increase dividends significantly. I don’t like the fact that management in 1993 cut the dividend significantly. Dividend growth is nothing special. IBM’s balance sheet is very weak. I would ignore IBM until its share price drops below $125.64. The dividend yield would be higher and you would have a much better chance at some capital appreciation. This will give IBM some time to reduce debts and to build up its current ratio and quick ratio.
DISCLOSURE – I don’t own International Business Machines Corp. (IBM).
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