Is IBM A Buy Before Its Spin Off?

With new cases of the coronavirus spiking in the US and worldwide .

With the already historic unemployment levels and job losses in recent months .

With massive uncertainty in hospitalsbanks, and other industries.

And with many Blue Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.

There are few safe places to invest today. And this number grows smaller every day this crisis lasts.

The key to continue compounding your investments and build wealth is to keep investing well over time.

This is a huge part of things.

But another huge part of this that few think of is losing as little capital as possible.

The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you achieve your retirement goals.

To help you avoid bad investments, in recent articles I’ve shown you several stocks to avoid buying…

Today, I want to answer the question – Is IBM A Buy Before Its Spin Off?

International Business Machines (IBM) is a world leader in IT infrastructure and in the hybrid cloud industry.

And its getting ready to do a spin off which I’ll talk about more below.

Before that though, lets concentrate on IBM as it stands now.

It’s based in Armonk New York.  It has a $111.8 billion market cap. And it pays a 5.2% dividend. Which is reason #1 to consider buying its stock.

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.

Click the links below to see the stocks we recommend to Depression Proof Your Portfolio and earn safe investment returns.

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.

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