The Investment Reporter has upgraded U.S. tech stock IBM from a hold to a buy. IBM should leave behind its recent rough patch and earn record profits next year. It’s investing in fast-growing segments of the information technology industry. Growing profits will enable it to keep increasing dividends.
We regularly review global technology stock International Business Machines (NYSE─IBM) and we’ve upgraded IBM to a buy for long-term share price gains as well as attractive and increasing dividends.
IBM is cheap by some yardsticks of value. In 2015, it’s expected to earn $15.90 a share (all figures in U.S. dollars). This is down by 3.8 per cent from earnings of $16.53 a share last year. This is partly due to the high U.S. dollar. It reduces the value of the company’s foreign results. With about 55 per cent of its revenue coming from outside the U.S., the level of the dollar matters, And despite the shares’ lower earnings estimate this year, they trade at an appealingly-low price-to-earnings, or P/E, ratio just 10.5 times.
It’s expected to earn record profits in 2016
Next year, IBM’s earnings are expected to grow again. They’re expected to rise by 4.4 per cent, to a record $16.60 a share. Based on this estimate, the shares trade at an even better forward P/E ratio of only 10.1 times. IBM is investing in strategic information technology initiatives such as cloud computing, analytics, mobile computing and information security. It expects revenue from these initiatives to hit $40 billion in 2018 and account for over 40 per cent of its revenue.
The low forward P/E ratios indicate that little is expected of IBM. As a result, if its financial results are better than expected, the shares are apt to jump.
Regaining its ‘dividend aristocrat’ status
IBM has used its growing earnings over the years to maintain its rising dividends. During a rough patch in the early 1990s, shareholders said that IBM stood for ‘I’ve Been Mugged’. They said that it was called ‘big blue’ because it made its shareholders blue. At that time, new management stopped increasing dividends. That’s why the company is not yet what’s known as a ‘dividend aristocrat’. In the U.S., that’s a company that has raised its dividend for at least 25 consecutive years. IBM, however, is getting close to joining the dividend aristocrats once again.
IBM has raised its dividend quickly in recent years. And although it recently hit another rough patch, it has continued to raise its dividends. That’s partly thanks to the company’s high earnings, which are expected to start growing again in 2016. In addition, rising dividends partly reflect its solid balance sheet. IBM’s long-term-debt-to-cash-flow ratio is a comfortably-low 1.5 times. Its dividends now yield an attractive 3.1 per cent and deserve a place on any high dividend stocks list.
We’ve upgraded IBM to a buy again. Invest in the shares for long-term price gains as well as attractive and increasing dividends.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •7/12/15 •