Buy tech stocks CAE and IBM for share price gains and rising dividends

CAE’s share price has fallen recently but it did better than it seems in the first quarter of fiscal 2015. It has also sharpened its strategic focus. The company raised its yearly dividend by 16.7 per cent, to 28 cents a share. It has increased its dividend in each of the past four years.

In the three months to June 30, CAE reported net income from continuing operations attributable to shareholders of $43.8 million, or 17 cents a share. This was unchanged from a reported $44.7 million, or 17 cents a share, in last year’s first quarter. But CAE did better than these numbers suggest.
In the first quarter, CAE’s revenue inched up by 1.2 per cent, to $526 million. Meanwhile, all of its costs as a group declined by 1.1 per cent, to $473 million. With revenue up and costs down, the company’s earnings improved. Its pre-tax earnings came to $55.2 million. This was up by more than 24 per cent from pre-tax earnings of $44.5 million, a year earlier.

Income taxes marred CAE’s results

The trouble is, CAE faced an income tax bill of $11.6 million in the first quarter. This was a turnaround from a one-time income tax refund of $100,000 a year earlier. Last year’s first-quarter refund reflected a tax benefit from the depreciation and sale of simulators in Canada.

In fiscal 2015, CAE is expected to earn 80 cents a share. That’s up by 14.3 per cent from 70 cents a share last year. Next year the company’s earnings are expected to rise further, to 90 cents a share. Over the past year, CAE’s order backlog climbed by 11.9 per cent, to $4.932 billion.

CAE is disposing of its mining business. But it plans to continue building its healthcare business. While this business is still small, it’s growing and has a favorable long-term outlook.

CAE’s main segments are its Civil Simulation and Training business and its Defence and Security business. The Civil business is doing best. President and chief executive officer Marc Parent says, “The growth in our first quarter operating results came entirely from Civil, which saw operating income increase by 32% over last year. Defence had stable revenue and lower operating income, owing to the mix of programs in the quarter and persistent delays in government decision-making.”

Civil generated 61 per cent of their combined revenue and 69 per cent of their combined operating revenue. One plus for Defence was winning a contract to provide a Naval Warfare Training System to the Swedish Navy. This diversifies some of its business away from airplanes and helicopters.

CAE Inc. (TSX—CAE) remains a buy for long-term share price gains and rising dividends.

IBM much more than a business machine manufacturer

IBM is now a worldwide supplier of “advanced information processing technology, communication systems, services and program products.” In 2013, it generated 37 per cent of its revenue from Global Technology Services; 18 per cent from Global Business Services; 14 per cent from Systems and Technology; 27 per cent from Software; and the other four per cent from Global Financing. IBM is justified in using the term ‘Global’. Indeed, it generated about two-thirds of its revenue outside of the U.S.

Due to this broad diversification, IBM is a ‘multi’ sector company and no longer a manufacturer. As a result, its quality rating moves up a notch to ‘Very Conservative’. This broad diversification should also assist IBM in prospering in the years ahead, including in the fastest-growing countries in the world.

IBM’s earnings continue to grow year after year. Even so, it’s attractively valued. Based on this year’s expected earnings estimate of $17.93 a share, the stock trades at an appealing forward price-to-earnings ratio of only 10.7 times. In 2015, IBM’s earnings are expected to rise by another 11 per cent, to $19.91 a share. Based on this estimate, the shares would trade at an even better 9.6 times.

IBM raises its dividend each year. Its current $4.40 dividend yields 2.3 per cent. In 2000, for instance, it paid 51 cents a share. Buy the shares (NYSE—IBM) for long-term gains and rising dividends.



The Investment Reporter, MPL Communications Inc.
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