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For those investors looking to add a blue-chip dividend growth stock to their portfolio, they might want to do further research on IBM Corp. (NYSE:IBM) while it appears currently undervalued.

About IBM, taken directly from Google Finance:

International Business Machines Corporation is an information technology (IT) company. IBM's segments include Global Technology Services (GTS), Global Business Services (GBS), Software, Systems and Technology and Global Financing. GTS primarily provides IT infrastructure services and business process services. GBS provides professional services and application management services. Software consists primarily of middleware and operating systems software. On Jan. 9, 2012, IBM acquired Platform Computing. On Jan. 11, 2012, it acquired Green Hat. On Feb. 1, 2012, IBM acquired Emptoris Inc. On Feb. 15, 2012, it acquired DemandTec Inc. On Feb. 10, 2012, it completed the acquisition of Worklight. In May 2012, the Company acquired Varicent Software Incorporated. In May 2012, the Company acquired Vivisimo. In June 2012, the Company acquired Tealeaf Technology, Inc. On Aug. 1, 2012, Toshiba Tec Corporation acquired the retail store solution business from IBM.

Earnings Determine Market Price

The following earnings and price correlated F.A.S.T. Graphs™ clearly illustrates the importance of earnings. The Earnings Growth Rate Line or True Worth™ Line (orange line with white triangles) is correlated with the historical stock price line. On graph after graph, the lines will move in tandem. If the stock price strays away from the earnings line (over or under), inevitably it will come back to earnings.

Earnings and Price Correlated Fundamentals at a Glance

A quick glance at the historical earnings and price correlated FAST Graphs™ on IBM shows a picture of undervaluation based upon the historical earnings growth rate of 11.2% and a current P/E of 13.3. Analysts are forecasting the earnings growth to continue at about 10.9%, and when you look at the forecasting graph below, the stock appears undervalued, (it's inside of the value corridor of the five orange lines -- based on future growth).

IBM: Historical Earnings, Price, Dividends and Normal P/E Since 1998

Click to enlarge images.

IBM Performance Table

The associated performance results with the earnings and price correlated graph, validates the principles regarding the two components of total return; capital appreciation and dividend income. Dividends are included in the total return calculation and are assumed paid, but not reinvested.

When presented separately like this, the additional rate of return a dividend paying stock produces for shareholders becomes undeniably evident. In addition to the 9.4% capital appreciation (green circle), long-term shareholders of IBM, assuming an initial investment of $1,000, would have received an additional $319.50 in dividends (blue highlighting) that increased their total return from 9.4% to 10% per annum vs. 3.9% in the S&P 500 (red circle).

The following graph plots the historically normal P/E ratio (the dark blue line) in conjunction with 10-year Treasury note interest. Notice that the current price earnings ratio on this quality company is as low as it has been since 1998.

A further indication of valuation can be seen by examining a company's current price to sales ratio relative to its historical price to sales ratio. The current price to sales ratio for IBM is 2.10, which is historically high.

Looking to the Future

Extensive research has provided a preponderance of conclusive evidence that future long-term returns are a function of two critical determinants:

1. The rate of change (growth rate) of the company's earnings

2. The price or valuation you pay to buy those earnings

Forecasting future earnings growth, bought at sound valuations, is the key to safe, sound, and profitable performance. The Estimated Earnings and Return Calculator Tool is a simple yet powerful resource that empowers the user to calculate and run various investing scenarios that generate precise rate of return potentialities. Thinking the investment through to its logical conclusion is an important component towards making sound and prudent commonsense investing decisions.

The consensus of 26 leading analysts (light purple highlighting) reporting to Capital IQ forecast IBM's long-term earnings growth at 10.9% (orange circle). The company has medium long-term debt at 53% of capital (red circle). It is currently trading at a P/E of 13.3, which is inside the value corridor (defined by the five orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, IBM's True Worth™ valuation would be $378.46 at the end of 2017 (brown circle on EYE Chart), which would be a 14.7% annual rate of return from the current price (yellow highlighting).

Earnings Yield Estimates

Discounted Future Cash Flows: All companies derive their value from the future cash flows (earnings) they are capable of generating for their stakeholders over time. Therefore, because Earnings Determine Market Price in the long run, we expect the future earnings of a company to justify the price we pay.

Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk Treasury bonds. Comparing an investment in IBM to an equal investment in 10-year Treasury bonds, illustrates that its expected earnings would be 8 (purple circle) times that of the 10-Year T-Bond Interest. (See EYE chart below). This is the essence of the importance of proper valuation as a critical investing component.

Summary and Conclusions

This report presented essential "fundamentals at a glance" illustrating the past and present valuation based on earnings achievements as reported. Future forecasts for earnings growth are based on the consensus of leading analysts. Although, with just a quick glance you can know a lot about the company, it's imperative that the reader conducts their own due diligence in order to validate whether the consensus estimates seem reasonable or not.

Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. A comprehensive due diligence effort is recommended.

Source: IBM Corp.: Stock Research Analysis