IBM Trails Market By 30% - Is This A Buying Opportunity?

| About: International Business (IBM)

International Business Machines Corporation (NYSE:IBM) provides information technology (NYSE:IT) products and services worldwide. IBM has rewarded its shareholders with double-digits dividend increases each year over the past decade, including an announcement earlier this year that it would be increasing its dividend by 12%.

However, this has not always translated into a consistent rise in the stock price. In fact, the stock is down this year despite the overall market being up almost 25%.

IBM Chart
(Click to enlarge)

IBM data by YCharts

Dividend History

Included below are the dividends and growth rates for the past decade, along with IBM's payout ratio:

Year Dividend Dividend Growth Payout Ratio
2003 $0.63 --- 14.5%
2004 $0.70 11% 14.2%
2005 $0.78 11% 15.9%
2006 $1.10 41% 18.2%
2007 $1.50 36% 20.9%
2008 $1.90 27% 21.3%
2009 $2.15 13% 21.5%
2010 $2.50 16% 21.7%
2011 $2.90 16% 22.2%
2012 $3.30 14% 23.0%
E2013 $3.70 12% --

IBM has increased its dividend every year for the past 18-years, even throughout the financial crisis. Furthermore, the compounded annual growth rate of the dividend was almost 20% over the past decade (2003-2013). So clearly IBM has been a consistent dividend growth stock for years.

Interestingly, IBM has managed to deliver this dividend growth while maintaining a relatively low payout ratio that is still under 25%. While this does represent a significant increase from ten years ago, it is still relatively conservative, and provides some assurance about the safety of the dividend, as well as room for continued dividend growth even during periods of limited earnings growth.

Dividend Discount Model

Using the dividend discount model, I determined the value of the company based on its future dividend payments. In performing this valuation, I made several assumptions:

  • First, I used 8% as my discount rate, based on the long-term average return of the stock market
  • Next, I used IBM's estimated FY13 dividend as the base to apply future growth rates to, and assumed its most recently announced dividend ($0.95) will be paid in December
  • I applied a 13% growth rate for 2014-2016, a 12% growth rate for 2017 & 2018, an 11% growth rate for 2019-2021, and a 10% growth rate for 2022 & 2023
  • Finally, I assumed a 4% perpetuity rate after 2023

Based on these assumptions, I calculated that IBM's intrinsic value is ~$179 per share. At the current price of $182 per share, the stock seems to be fairly valued, however, it offers very little margin for error.

In addition, my assumptions are somewhat aggressive, such as a 13% growth rate for the next few years, and a perpetuity rate of 4%. So investors should pay close attention to their growth assumption and make adjustments based on their own outlook.

Overall though, historical performance seems to indicate that IBM is a consistent dividend paying stock, that rewards its shareholders with very strong growth in its dividend as well. Therefore, long-term, income-oriented investors may want to give IBM a closer look to see if it should be included in their portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. 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 dividend 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 their specific situation.

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