Blue Chip Turnaround at Big Blue?
03/19/2015 8:00 am EST
Our latest recommendation has seen its business suffer at the hands of disruptive cloud-based companies, observes John Dobosz, editor of Forbes Dividend Investor.
Ginni Rometty—CEO of International Business Machines (IBM)—has been explaining to Wall Street analysts who follow the stock how she plans to reinvigorate growth at the company.
She recently said that she plans to spend $4 billion investing in “strategic imperatives” that include significant focus on cloud and security businesses.
IBM traditionally made its money serving huge corporations and governments with proprietary hardware and services, sold with long-term contracts. That is still the foundation of its business, but the areas in which Rometty is boosting spending are growing much faster.
Perhaps the analysts are not impressed, as the stock has not responded. For us, that’s no problem since it allows us to lock in a slightly higher yield on a dependable dividend-paying stock trading at compelling discounts to historical valuations.
IBM shares took a beating last year, falling from $200 to $150. The shrinking top line is responsible. This year, analysts expect revenue to decline 7.6% to $85.7 billion and earnings to fall 3% to $16.02 per share.
The thesis here is that IBM has adapted to the market before and gone on to thrive. Besides its longevity, IBM’s rich pool of talent and the biggest trove of intellectual property in the world of technology prove that it’s quite capable of adjusting its business to adapt to changing markets.
Dividends have been paid regularly since 1962 and have been raised rapidly in recent years to the current quarterly payout of $1.10 per share. That’s good for a 2.73% yield at current prices.
Looking at valuation, IBM trades at a 13% discount to its average price-to-sales ratio over the past five years. It also trades at a 10% discount to its five-year average enterprise value to EBITDA ratio. The discount to the average price to cash flow from operations is 12%.
There is no guarantee that IBM will quickly turn around its revenue problem, but history suggests that this blue-chip with a long history will figure it out eventually, and with this yield, we’re paid well while we wait for the turnaround to take hold.
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