Recent Buy

buyWhat a month! I’ve been trying to keep a tight fist on my capital, seeing an urge to conserve cash in lieu of purchasing equity stakes in high quality companies because I’m feeling a bit cautious about the broader market’s modest overvaluation, and in turn the modest overvaluation of a lot of underlying stocks in the market. How have I done in that regard? Poorly!

I’ve said it before, and I’ll say it again: I’m a dividend addict! So, I constantly have this internal tug-of-war where I have the prudent half of my personality clamoring for patience and the eager half of my personality fighting for the further acquisition of shares in high quality companies. A little play on greed and fear, I suppose. A microcosm within my own mind. However, since I don’t believe in timing the market (because I wouldn’t be good anyhow) I just continue to build my portfolio one company at a time, month after month. So maybe I’m a little more prudent and a little less greedy than I might appear.

The greedy side has been winning handily. I started off the month adding to my burgeoning position in Digital Realty Trust, Inc. (DLR) and quickly followed that up with an addition to shares in Altria Group, Inc. (MO). Then I capped off the buying spree with an initiation of a position into American Realty Capital Properties, Inc. (ARCP). Or, so I had thought. I wasn’t as done as I thought I was.

As part of my Recent Buy series, I try to let my readers know of any equities I purchase soon after the transaction is completed. This is just one way I try to document my progress toward early retirement and financial independence.

I purchased 10 shares of International Business Machines Corp. (IBM) on 8/28/13 for $181.47 per share.

I recently wrote about how I’m a fan of IBM at today’s valuation and why. The current 52-week low of IBM shares if $181.10, so while I don’t know where it goes from here I feel fairly confident in the price of which I paid based on the company’s fundamentals and the growth prospects going forward.

IBM is a global information technology company. They’ve were incorporated in 1911 and have operations in over 170 countries. They operate primarily in three segments: Hardware/Financing, Services and Software.

I’ll start by saying I’m not a huge fan of technology companies in general. You can scan across my portfolio and notice that I’m sparsely invested in them. I have one fairly sizable position in Intel Corporation (INTC), but that’s only my only straight play on technology. Of course, it’s difficult to avoid technology as an investment because companies of all sizes in all industries use technology to build their businesses and grow accordingly.

However, I’m a fan of IBM because of it’s ability to adapt. It shifted from being primarily a low-margin hardware provider to focusing on higher-margin software and services operations. It started this transition well over a decade ago and has reaped the rewards in the process. Whereas hardware/financing was 35% of pre-tax income in 2000 it is now just 14% of pre-tax income as of 2012. In the interim, the software segment has mostly filled that space. During this time, pre-tax income margin rose from 10.2% to 22.2%.

Due to such dramatic shifts in the business, IBM is primarily a services and software company. They provide enterprise data solutions to businesses along with the software needed to connect multiple platforms. For instance, they can take raw data and filter it into analytics that businesses need and place a premium on. They’re making big moves into Cloud computing and IBM sees a future where there is increasing interconnectivity between the mobile devices people increasingly use, networked services and social enterprises. As such, they’ve placed themselves as a leader in the industry.

Growth has been strong. Since 2003, earnings per share have grown from $4.34 to $14.37 in 2012. That’s a compounded annual growth rate of 13.97%. That growth rate has largely been fueled by one of the biggest share buyback programs in the world. Since 2000, IBM has reduced their share count by over 35%. Revenue growth hasn’t been as impressive, but has been quite stable even through a recession and the Great Recession. Since 2003, revenue has a CAGR of 1.78%. The debt/equity ratio is a bit high at 1.5, but the interest coverage ratio is very strong at over 45.

I mentioned this before, but some investors might take some solace in knowing that Warren Buffett is a huge fan of this business. IBM is now the third largest position in the Berkshire Hathaway (BRK.A) investment portfolio, of which Buffett directs. I’ll come right out and say that I’m a huge fan of Buffett. And I’m not just a fan of his investment prowess, but his general take on life and the way he presents himself. His keen knowledge on many subject matters is astounding, and the affable manner in which he presents this knowledge is extremely impressive. Buffett has been the most successful investor of the 20th century, and probably the most successful investor of all time. If he’s a fan of IBM, I’d say that’s a qualitative factor that one may want to consider. He initiated his stake back in 2011, at what is speculated to be an average price of $173. I do quite enjoy knowing I can buy a piece of this blue-chip company for a price not too much higher than what the greatest investor we’ve ever known bought in at.

Investing in IBM, it’s important to be aware of the fact that IBM is a big goal-setter and likes to achieve those goals. Currently, they operate under a 2015 Road Map which dictates that IBM wants to achieve $20 EPS in 2015. As well, they want to return $70 billion to shareholders and invest $20 billion in acquisitions. The $70 billion that plans to get returned to shareholders is broken up into $50 billion in share buybacks and $20 billion in dividends. I’ll gladly invest in a company that puts big goals up, delivers on them and puts a priority on rewarding the shareholders.

Of course, we should talk about dividends! IBM doesn’t have a particularly exciting entry yield. Sitting at just 2.1% on my purchase price, there is room for desire. However, IBM has a particularly phenomenal growth rate of the quarterly dividend. They currently pay $0.95 per share quarterly. That dividend has a growth rate of 18.8% over the last 10 years. They’ve been growing the dividend for 18 years, which is particularly strong considering they’re a technology company. With a payout ratio of just 27%, there is plenty of room in the tank for further significant dividend raises.

I valued shares in IBM in my typical fashion: performing a Dividend Discount Model analysis and compared that to analyst calculations to come up with a reasonable range of intrinsic value. Using a DDM with a 10% discount rate and a 8% growth rate (well below the 10-year average) I get a Fair Value of just over $205 per share. With a P/E ratio of 12.96, I feel comfortable that a comfortable margin of safety exists on IBM shares at the current price.

This purchase adds $38.00 to my annual dividend tally based on the current quarterly payout of $0.95 per share.

I’m currently invested in 39 companies, as this was a new investment.

Some current analyst opinions my recent purchase:

*Morningstar rates IBM as a 4/5 star valuation with a Fair Value estimate of $208.00
*S&P Capital IQ rates IBM as a 4/5 star Buy with a Fair Value calculation of $230.40.

I’ll update my Freedom Fund in early September to reflect my recent addition.

Full Disclosure: Long DLR, MO, ARCP, IBM, INTC

What do you think of my recent buy? Are you a fan of IBM at today’s prices?

Thanks for reading.

Photo Credit: Stuart Miles/FreeDigitalPhotos.net

Similar Posts

45 Comments

  1. I just hope For a THREEPEAT. Lou G/Sam P both turned out to be great CEOs. Lets hope Ginni can do the same.

  2. Great buy. However, I’m envious as I initiated in IBM recently at 193 and then added more at 185. Regardless I’m happy to own this company and happy you’re on board!

  3. Welcome aboard! Glad to see you join our ranks as one of IBM’s shareholders. I started with 10 shares at 195 and added 12 shares at 183. If the fairly low valuation persist I may buy another slice.

  4. Great choice Dividend Mantra. I purchased IBM 5 times last(sept.) month @ at cost basis of 184. This is the only tech company I would buy now.

  5. The share buyback program has to stop/slow down soon than later, less they will become a private company. When that happens I would expect a large dividend increase as well as a long future of them. The 27% is low with room to grow with the buybacks, it’ll be something with a substanially reduced buyback program. IBM is near the top of the list when new funds come in the next weeks. Also The Conservative Investor is a huge fan and buyer, another plus.
    Thanks for a great blog it is very helpful and informative,
    Josh

  6. I like IBM as a company, but the starting yield is a bit too low for my tastes. I’d prefer at least 2.5% entry. But to be fair, you did grab IBM at a few cents away from its 52 week low and the dividend growth rate is high, so this might be one of the best opportunities to grab this company.

  7. Anonymous,

    There was so much I left out, for sake of brevity. I didn’t want this post to become a book. But great management is something that IBM has had in spades going back for many decades (Moffat aside).

    Ginni seems to be doing a great job so far. Palmisano was one of the all time greats.

    Let’s hope for continued success in that regard.

    Best wishes!

  8. Took2Summit,

    Glad to join you as a shareholder! IBM is just hard to ignore at today’s valuation. The yield doesn’t eclipse 2% very often, and it’s a full 10 basis points above that level right now. Not too shabby.

    Glad to be on board. I hope it continues to serve us well.

    Cheers!

  9. Anonymous,

    Thanks so much. I’m happy to be on board. IBM is historically a very well-run company that just continues to do the right things. The huge buyback program and steady revenues offers a pretty solid floor for the stock, which is probably one of the reasons Buffett bought such a large stake.

    If it dips from here I’ll probably be joining you in buying another slice.

    Best regards.

  10. Anonymous,

    Great buy there! I think IBM looks like an excellent purchase in the low $180s. If it drops below $180 I’ll be tempted to buy even more.

    This is really a great tech company because it’s not just purely tech. I almost look at it like a company like ADP. IBM also has high switching costs on it’s side, and it provides a lot of intricate services using company specific software, and once installed it’s hard to move on to a competitor. Of course, they operate in an intensely competitive space so that’s the one negative here. I think IBM has a pretty solid moat around the business, overall.

    Thanks for stopping by!

    Best wishes.

  11. Bryan,

    That internal battle is usually won by the dividend addict in me. The quicker I can build up the snowball of dividends that can one day finance purchases all by themselves, the better off I’ll be. Sometimes I pay a bit more for than I’d like for high quality assets, but I know that 10 or 20 years down the road the 1-2% differences in price won’t matter. I try to keep perspective. The longer horizon an investor has, the larger the margin of error can become before it causes problems. A short-term invesor, however, has to be very careful with pricing.

    Best regards!

  12. Josh,

    Thanks for stopping by!

    Well, IBM still has ~1 billion shares so I’m sure that buyback program will continue to stay strong for the foreseeable future. Which, of course, is fine by me seeing as how it increases my ownership position with no action on my part. 🙂

    I just noticed that Tim is also a fan at today’s prices and he gives pretty compelling reasons why. Obviously, I’m inclined to agree.

    I agree with you. When that buyback program finally does slow down that will free up even more FCF to fuel further dividend raises. Of course, revenue growth will have to pick up to fuel EPS growth at that point. IBM wants to stay strong with CAPEX on R&D and also wants to continue a strong acquisition record. There’s a lot of things to like here.

    Glad you enjoy the blog. I hope you stick around!

    Cheers!

  13. MFIJ,

    I hear you on the yield. I’m okay with it for right now because a lot of my recent purchases have targeted higher yield/lower growth securities like the REITs and Altria. This one balances that nicely with a lower yield/higher growth profile. I’d love a 2.5% yield too, but IBM rarely offers investors a chance to get above 2% so this appears to be a great time to buy from a yield perspective.

    I hope you’re enjoying your long holiday weekend!

    Best wishes.

  14. Way to go DM,
    I understand your internal battle between conserving capital, awaiting better opportunities, and investing now. The important thing, at least in my mind, is always to have new capital becoming available to reinvest….which is why dividend investing is such a great system. I bought IBM at the end of last week also. Let’s hope IBM’s record of dynamic growth continues. Here’s hoping for lower prices in the future

  15. IBM is a solid company. They are very much admired all over the world and in multiple types of industries. A sizable portion of my portfolio (~10%) is in tech, I don’t think I have room to add another tech-related company.

    I plan on adding to my WMT and OHI positions this week.

  16. Spoonman,

    Great ideas there on WMT and OHI. WMT is cheap here and OHI has taken it on the chin with the rest of the REITs.

    I hear you on tech. I wouldn’t want to allocate any more to tech if I were you. I’m somewhere a little under 6% on tech, and I don’t even like the allocation being that high. I wouldn’t mind 5% or less, to be honest.

    Best of luck with the purchases. WMT is at the top of the list for me right now.

    Take care.

  17. starke,

    Great buys there. WMT is at the top of the list for my next buy. I think it’s attractively valued here. I just hope it doesn’t move too much higher from where it is now!

    Keep up the great work on buying positions in high quality companies!

    Cheers!

  18. Although I do not own Altria Group (MO), I can see the logic of buying. If it was me (which it is not), I would consider writing the cover call for Oct 19, 2013 @ $35 (48 calendar days). It nets you about $.54 – $.55 a contract, which would more than the yearly dividend and is 3.3% out of the money.

    Might have to consider picking up couple hundred shares actually, that strategy (repeated each 48 days would be 13.5% + a 3.3% refreshing even 48 days out of the money potential).

  19. Drew,

    I don’t use options as part of my strategy. I prefer to invest in equity and receive a return on my equity, reinvesting part of that return (dividends) along the way. Although I will say that when properly used options can be a fantastic tool to hedge your bets and collect a premium in the meanwhile. I just prefer to go long and hold, and so I don’t cap my upside this way.

    Thanks for stopping by!

    Best regards.

  20. I completely understand that you don’t want to cap the upside.

    It’s personal preference, I just like seeing those extra payments every month and being more conservative. Actually there are times where I do a strategy on a call spread after writing the cover call, which makes those premiums double as long as the stock stays even or above by the expiration date.

  21. DM, I also couldn’t resist a few purchases recently, although I lowered my available cash way below a safe limit, so I am a bit afraid now. Hopefully September will not be too disastrous since that would put me in trouble. If not I have a few option contract expiring which should release some cash and then I will be good. I am also very cautious these days and was piling cash. But couldn’t resist adding a few positions 🙁
    Well, we will see, said a blind man…

  22. Hello,
    Love reading your blog. I find myself reading it WAY too often.
    Would you mind posting a few of your filters you use to find these companies? (I think it would make an excellent blog post of how your company selection process begins)

    The filters I am using to find good valued companies are not coming up with any of the companies you have mentioned in your “recent buys” and I am beginning to wonder if I am choosing the right filters (P/E, debt/equity, price/book, div payout %, etc)

    Thanks
    -Jason W

  23. Hi Mantra,

    I have a question about cash reserves. Do you calculate how much you are going to keep on hand and then everything above that you use for stock purchases (as they are desirable) or do you keep a pool handy above your “emergency fund” and just execute stock purchases when the opportunity arises?

    Personally I am a bit behind on my purchases but will not dip into my “emergency fund” or what I believe I need to have on hand cash wise to make those purchases, so I end up making purchases as cash comes in above that, and it never seems to be enough soon enough! If I can catch up (build out all the positions I want to that are priced right and produce the amount of dividends I desire and are the correct businesses for me to own) then if I get a tip or something I can work on that, but that doesn’t seem it will be for a long while.

    Your comments appreciated, thanks in advance!
    ~Katz

  24. I see that you are invested in VOD. With the run up in price and selling its stake in VZ, is it time to sell? Could you tell us what you think before the markets open on Tue. Thank you!

  25. Martin,

    We’ll see what September brings us. Some of the talking heads are predicting slight calamity due to ongoing tension with Syria and the continued talk from the Fed regarding the tapering of QE. Not to mention the fact that market has obviously been so hot the first six months or so of the year.

    I hear you on not being able to resist. I probably could have held off on MO, but other than that I think the other three purchases (DLR, ARCP, IBM) represented value that I just couldn’t pass up. If they go down from here due to a weak September then I’ll just be glad that further opportunities have come my way. 🙂

    Take care!

  26. Jason,

    Glad you enjoy the blog! I put a lot of time into Dividend Mantra and it represents a big part of my life.

    As far as stock screeners, I very rarely use them. To be quite honest, the best “screener” of all for someone who is interested in companies that have track records of increasing dividends is David Fish’s CCC document. He’s compiled companies that have at least 5 years of dividend growth and then up from there. The document then also lists pertinent information like P/E, P/B, PEG, payout ratio, debt information and the like. It’s truly a gold mine.

    You can find it here:

    http://dripinvesting.org/Tools/U.S.DividendChampions.pdf

    As a quick note, REITs might not come up on a screen where you’re filtering by P/E because valuing them requires using FFO or AFFO, which most screens won’t show.

    I hope that helps.

    Cheers!

  27. Katz,

    I keep around $3k-$4k in my checking account as my emergency fund. I keep a low fund because I have such a high savings rate and I also have quite a bit of credit available to me if the need were to arise.

    Anything above and beyond that I consider “fair game” and at that point is capital I can use for equity purchases. As it stands right now, my capital reserve is a bit above what I usually carry and that’s due to the fact that the market hasn’t presented a lot of outstanding opportunities this year and there’s a project I may be involved in late next year that will require some capital. Under ordinary circumstances, however, I like to put as much excess capital to work as I can possibly afford and that’s the way I’ve done it since the beginning. At no point during my journey have I had thousands of dollars sitting around, not earning a return.

    There’s some people out there that like to keep some extra cash on hand, above and beyond what they consider their emergency fund. This is to be used when the market really dips heavily. I have considered this strategy, and have “accidentally” built up such a reserve due to, like I said, a lack of opportunity and a project I may be involved in next year. Obviously, the amount of money you make and the size of your portfolio have a lot to do with this.

    I actually wrote about this subject not too long ago:

    https://www.dividendmantra.com/2012/12/holding-vs-deploying-cash.html

    Best wishes!

  28. Anonymous,

    I’m taking a wait-and-see approach to VOD right now. To be honest, I don’t agree with the sale of the Verizon wireless assets. I think that’s the brightest star in VOD’s universe. And the question then becomes, how do they reinvest that capital? Are there better assets out there than Verizon’s wireless business? That’s really the question. I’ll be looking to see how much of this capital gets returned to the shareholders via either a special dividend or buybacks. From there, how much of this capital can be wisely used right now? Also, Verizon wireless also accounts for quite a bit of the operating capital for VOD, so there’s a lot to look at here.

    Right now, I’m keeping a close eye on it. If the sale goes through I’ll be paying keen attention on what management says it’s intent is on use of the capital (which will be substantial).

    Best regards.

  29. Anonymous,

    While I was writing this, the news already came out:

    http://money.cnn.com/2013/09/02/investing/vodafone-shareholder-payout/

    It looks like we’ll be getting shares in VZ along with a special dividend. Also, VOD announced an 8% raise to the current dividend.

    This will bring out value in VOD shares, as it already has. Some will like this, although as a hardcore value investor I preferred VOD the way it was: an undervalued telecom paying out a generous dividend and a great, undervalued asset on the books in a 45% stake in Verizon wireless. The deal won’t close until 1Q 2014, so if you’re looking to sell your shares you’ll be best off waiting until everything finalizes. I plan to hold and keep on looking for further news on what VOD plans to do with the rest of the cash. Again, I would have preferred them not sell VZW, but I understand that Verizon wants 100% of their own wireless business and who can blame them?

    Best regards.

  30. DM, great reply, thanks! I personally prefer my “emergency fund” to be in cash and to be at least 18mo of what I spend though financial “experts” have told me I keep way too much cash. I have considered fixed income accounts instead but they have lost value to the extent that it might be better to keep the funds in something like Coca Cola, the cash to bank time would be the same. I read about the Talmud Asset Allocation model where 1/3 is in cash, real estate and business (stocks, etc…) and that kind of stuck as it is very hard to re-balance or catch market dips if there is not a lot of cash on hand at any given time. However, at this time I consider my portfolio to be unbalanced, in my opinion, and it would take more than 33% additional cash to balance it if I don’t want to sell anything which I don’t!

    Best regards!

  31. Well VZ currently pays a 4.3% yield and VOD 6.4%. I was going to pull the trigger on my VOD purchase last week but didn’t, sorry I didn’t. As I see it this can only be a win-win situation for dividend investors. It diversifies the holding a bit and VOD has said they will increase the dividend, surely they have a substantial business without the VZ portion or they wouldn’t be doing that, and a plan going forward as well. If I wasn’t so far behind I would take a 1/2 position in VZ and a full position in VOD now and then rebalance (buy more) after the dust settles.

  32. Hi Dividend Mantra,

    I really love your site!!!! The transparency makes it really valuable. Recommendation: would it be possible to also include the avg. price point that you used to purchase your stocks on your Freedom Fund. I think that’d be helpful to know.

  33. Anonymous,

    Thanks! I’m glad you enjoy the blog. The transparency throughout the site is something I purposely set out for right from the beginning. There’s a lot of books out there showing how people can retire early and make a lot of money. There’s a lot of talk, but not a lot of walk. I wanted to show readers exactly what is possible with hard work, determination, persistence and consistency. For better or worse, this will display that.

    As far as your recommendation goes, I’ll definitely consider it. I didn’t want my spreadsheet to get out of control with multiple columns displaying all kinds of information. And to be honest, it’s time consuming. However, in the meantime you can access most of my purchase prices throughout the blog as I always publish purchase prices and dates. Any that you don’t see on the blog I’d be happy to talk about.

    Cheers!

  34. You seem to commonly use the DDM with 8% growth and 10% discount, is there a reason you use these specific figures regularly?

  35. Anonymous,

    Great question!

    I use a 10% discount rate because that’s the return I’m looking for. That’s above the stock market’s historical average, so there is a margin of safety built in with that number. If I were to use a lower number, that would make the values of these stocks go up to the point where risk-adjusted returns wouldn’t make sense.

    I don’t always use a 8% growth rate. The growth rate will vary depending on the growth rate of the company. I typically use a lower number like 5% for REITs because the growth is lower and the yield is higher. I use 7-8% rates for most other companies because it’s closer to the long-term growth rates. I also always look to use a growth rate below what the company actually produces to further build in a margin of safety.

    Hope that helps.

    Best regards.

  36. Have you considered CA? I just came across them recently. Looks like similar business/industry to IBM, but better numbers:

    P/E: 12.87 vs 13
    Yield: 3.38% vs 2.08%
    Stock buybacks: aggressive for both
    Net profit margin: 21% vs 16%
    Mkt cap: $13.5 B vs $200B
    LT debt to assets: 10% vs 20%
    Revenue growth (5 years): growing vs stagnant

  37. Anonymous,

    Thanks for the idea! I always love learning about new, interesting opportunities I hadn’t considered before. I haven’t heard of CA before. Taking a very quick look at it shows they just started aggressively raising the dividend, but this is definitely one to watch. I really appreciate you dropping by and sharing. 🙂

    Best wishes!

  38. Pingback: Recent Buy

Leave a Reply