Can Big Blue Produce Big Green?

By Ryan Guenette - August 11, 2012 | Tickers: EMC, IBM, MSFT, ORCL, SAP | 0 Comments

• Email
• Print

International Business Machines Corporation (NYSE: IBM) is a huge business. Being worth $226.03 billion, IBM is an information technology (IT) company which operates in the divisions of global technology services, global business services, software, systems and technology and global financing. Since IBM was founded in 1889, it has played a priceless role in the evolution of technology. IBM’s technology allowed organizations to process extraordinary volumes of data, developed the first computer system family, and developed the laser-scanning barcode reader system that is still used to this day in stores around the world. IBM’s latest innovation is Watson, an artificial intelligence computer that is capable of learning as it operates.

Over the past 10 years IBM has rallied 175.37%, vastly outperforming the S&P 500 which only rallied 54.09% during this period. So can big blue produce big green?

Big Blue in Black

In 2009, IBM reported earnings per share of $10.00. In 2014, the average consensus believes IBM will derive $16.90 from its business. That represents a 69.00% increase in earnings per share over just 5 years. Based on these statistics, IBM’s compound annual growth rate (CAGR) is 11.07%, an astonishing feat for a company worth more than $200 billion. IBM’s growth is rather consistent, projected to grow every single year during this five year period. Currently, IBM pays out an annual dividend of $3.40, which at current prices, puts IBM’s dividend as yielding 1.72%. That is up from last year’s annual dividend of $3.00, and is further expected to expand into the future. By 2014, the street expects IBM’s dividend to reach at least $3.78. This projection displays 11.18% growth in the dividend over just two short years. IBM’s dividend outpaces both the ten year treasury rate as well as inflation, and adds some substantial value to the stock.

The chart below displays IBM’s sales, operating profit, net income, net margin, operating margin, earnings per share, dividend, and rate of dividend (the percentage of net income that is paid out in the dividend) over the coming years.

Sustainability and Long-Term Growth Plan

IBM has been in business for 123 years, and is one of the oldest companies on the face of the Earth. There is an underlying demand for IBM’s services or products over the long-term. IBM has shown rock-solid sustainably through the years, living through numerous events that have shaped the world as we now it as today. Going forward, IBM’s future growth plan should provide significant expansion in the foreseeable future. One huge sector IBM is focusing on is analytics. Analytics are one of the fast-growing sectors IBM operates in, driven by the increasing sophistication that companies are presented with in decision-making situations. The market research firm Gartner believes, “the scope of analytics will expand manifold over the next few years, and will be a must for enterprises. We believe that IBM remains well positioned to grab this opportunity going forward.” IBM has four long-term growth initiatives: analytics, which IBM expects to be a $16 billion business by 2015, cloud computing, smarter planet, and growth markets. Another crucial segment of IBM’s growth strategy is acquisitions, which since 2005 IBM has spent $14 billion to acquire 25 companies. In conclusion, IBM has undeniable sustainability, as well as a clear-cut growth strategy for the future.

Is IBM the King of Tech?

Compared to some of IBM’s most prominent competitors, such as: Oracle Corporation (NASDAQ: ORCL), Microsoft Corporation (NASDAQ: MSFT), EMC Corporation (NYSE: EMC), and SAP AG (NYSE: SAP), IBM compares relatively in-line.

In terms of growth, IBM stands out to the downside, while EMC tops the charts. All companies in the industry pay out dividends, except for EMC, with Microsoft having the largest dividend, and SAP as having the fastest growing dividend. In the fundamental ratio comparison, EMC appears to be trading at a premium, while IBM trades with the lowest multiple. When growth is taken into account, SAP appears a little pricy, while EMC trades at a discount. In the net profit margin comparison, EMC stands out to the downside, while Oracle stands out to the upside.

The Foolish Bottom Line

IBM has been in business for 123 years, and is very likely to be in business for the coming 123 years. There is an underlying demand for IBM’s services and products that does not falter through any economic environment. IBM has rock-solid fundamental growth, and also pays out a decent dividend. Additionally, the company possesses extreme sustainability, and a clear cut growth path. Big Blue will not provide explosive returns to its investors in the future, as IBM is already worth over $200 billion, but may provide modest gains to the long-term investor.   

• Email
• Print
• Feedback