IBM Is Now A Buy Before Its Upcoming Spin Off
Back in October I answered Is IBM A Buy Before Its Spin Off? In that article I told you to avoid it for now…
Today, I give an update after it released updated quarterly earnings and tell you why IBM Is Now A Buy Before Its Upcoming Spin Off.
You can read the past article in full by using the link above…
But if you don’t want to; here’s a quick recap of what I said back then about buying it before we get to today’s update.
IBM’s 5.2% Dividend
Over the last decade IBM’s paid out a total of $45.69 per share in dividends.
At today’s count of 894 million shares that’s equal to $40.9 billion paid out to shareholders in the last decade.
Plus, it also grew its dividend 160% from $2.50 per share in 2010 to $6.49 per share in that time. This is an annual dividend growth rate on average of 16% per year.
These dividend payments and the growth in them help you earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
It can do this because it earns huge profits and cash flows. Which is reason #2 to consider buying IBM before its spin off.
IBM Earns Huge Profits
Over the last decade it earned an average operating income margin of 17.9% per year.
I look for anything above 10%. Why?
Because after evaluating thousands of companies over the last 14 years of my career I estimate fewer than 5% of all companies worldwide produce operating profit margins above 10% over extended periods.
This makes IBM a great operating business.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 14.8% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.
IBM surpasses my thresholds on both important metrics and that makes it an incredibly safe and valuable investment.
On top of these wonderful things it’s also cheap…
IBM IS Cheap
With the markets at or near all-time highs you’d expect a fantastic stock like IBM to be selling at an enormous valuation.
But it’s not.
As of this writing its P/E is 14.2.
Its P/CF is 7.4.
And its forward P/E is 10.4.
On all three metrics I look to buy investments below 20 to consider them undervalued.
This means, IBM is undervalued by a large amount.
And this means owning its stock gives you a margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With IBM being undervalued it makes the investment less risky.
But there is one issue with IBM…
IBM Has A Lot Of Debt
To revitalize and transition its business from the slowly decaying hardware and IT infrastructure services businesses, IBM bought hybrid cloud company Red Hat in 2019 for $34 billion.
And it financed this transaction with a lot of debt.
After it released its latest earnings on October 19th, 2020 it has $15.8 billion in cash against $65.4 billion in debt.
Its debt-to-equity ratio is 3.39 – which is above the 1 and below I look for.
As a percentage of its balance sheet total liabilities make up 86.7% of its current balance sheet.
And its debt makes up 58.5% of its entire $111.8 billion market cap.
With all the craziness going on, I need to invest – and recommend to you – stocks that will be around for decades to help build wealth over the long term.
Typically, this means I invest in companies that have little to no debt compared to their cash and equity.
Should You Own IBM Before Its Spin Off?
On October 8th, 2020 IBM announced plans to spin off its infrastructure services business into a new company and stock by the end of 2021.
EDITORS NOTE – When a company creates a new independent company by selling or distributing new shares of its existing business, this is called a spinoff. A spinoff is a type of divestiture. A company creates a spinoff expecting that it will be worth more as an independent entity.
What does this mean for you?
By the end of 2021, IBM stock will split into two different entities.
One is IBM which will now hold the faster growth $59 billion annual revenue Hybrid Cloud and AI businesses.
- Of major note for this business is its growing revenue at a rate of 19% per year right now.
The other business code named NewCo for now, will hold the declining $19 billion annual revenue IT infrastructure and hardware businesses.
- Of major note with this business is its got $108 billion in backlog – work contracted to do in the future. At its current rate this is almost 6 years’ worth of revenue.
When spin offs happen executives of the company can pick where they want certain assets and liabilities to go.
This includes IBM’s large debt load.
Until IBM says where the bulk of the debt is going after the spinoff, you should wait to buy its stock.
If you already own IBM shares continue holding because this is a potentially fantastic opportunity to see growth again after years of revenue declines.
If you’re looking for a solid, safe, stable, huge dividend paying, and enormously profitable investment to buy to Depression Proof Your Portfolio – consider investing in IBM before its spin off…
But only after things are clearer about where the debt is going.
I’ll keep you updated on this as more info becomes available.
This thesis to buy IBM before its upcoming spin off continued to play out after it released its most up to date quarterly earnings on January 21st 2021…
- Revenue was down 6% in the year-to-year quarterly period to $20.4 billion.
- Cloud revenue was up 10% in the year-to-year quarterly period to $7.5 billion.
- It reduced debt by $3.9 billion in the quarter.
- And in the full year revenue fell 5% in the year-to-year period to $73.6 billion.
- Cloud revenue rose 19% to $25.1 billion.
- And it reduced debt by more than $11 billion.
- Plus, it also announced its former CFO and Vice President of Global Operations Martin Schroeter would become the new CEO of spin off company code named NewCo.
While it didn’t release any other current info about the upcoming spin off, the naming of the CEO of the new company along with the massive reduction in debt are both wonderful things.
Even better news for you…
Its still cheap enough to buy.
This combined with the large debt reduction already – with more planned as we approach the spin off later in 2021.
And with its still large dividend, profits, and cash flows, I now recommend you buy IBM stock before its upcoming spin off.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.