TS2B: Tech Stocks 2 Buy, Dividends to Build On Edition with IBM on 01.25.21

Good morning all you Cyberpunks out there and welcome to the BCB Cyber Series that takes on the Tech stocks that can provide the cyber-fuel we need to pursue our digital wealth passions.

Today, we are tackling those big dividend payers that can add passive cash flow to our portfolios. That’s right, it’s the income as we sleep strategy.

As we dig for the cyber-fuel we need, we are always working to make sure the best of the best, those monster companies in tech, can form a key portion of our balanced portfolios.

For Dividend Payers, BCB Cyber is always looking for a forward annual dividend yield of over 3% as our key, defining feature. Better yet, we are looking for great tech companies we can build on overtime, delivering consistent value and technological prowess, not to mention a little cash on the side. And, its always better when we can buy them at a discount.

Tech Play Takes a Dive, Temporarily???

This week we are back to a value play that we’ve visited before: International Business Machines (IBM). IBM is a unique play that many feel has lost its luster but, as a company that has long prided itself on its ability to transform to the times it finds itself in, BCB Cyber believes this to be a unique opportunity. Better yet, with a current yield of 5.01% (from Nasdaq.com) and a newly reduced price, this may be one of the best opportunities yet.

Before we dive too deep though, we always offer this little reminder that we strongly advocate that we don’t act solely on anyone else’s opinion, not even ours! We weigh and measure our positions across a variety of metrics, balancing our portfolios and our position sizes along the way. Making sure we are all thinking for ourselves as self-definers and making our own decisions. In the end, the responsibility is on each one of us as individuals. So decide wisely!

BCB Cyber: Dividend Payer Edition on IBM

Jumping right in the BCB Cyber way, we cover 3 quick pieces of important information so we can get moving on our day. First, we tackle the story to find out who and what the company is, second, we look at the numbers both positive and negative, and finally we discuss our position on the stock.

This is TS2B, Tech Stock to Buy, Dividend Payer Edition, and this week we are going to take on IBM, the Armonk, New York tech powerhouse working to redefine artificial intelligence, hybrid cloud, blockchain and so much more!

1 – The Story*

*Note: As this is an update, the following contains some information from a previous post of ours. That Wealth Post from November can be found here. Updates have been added in what follows for the most recent events.

The story for International Business Machines (IBM), is one built on legacy, a commitment to the biggest fields of technological innovation and surprising value.

IBM began in 1911 and over the years has been transformed multiple times, from punch cards to introducing digital storage, IBM has long been a key player in the world of technological innovation. Even when that meant changing the product line.

That story today begins with yet another opportunity to redefine itself. IBM’s merger with Red Hat, a $34 Billion Dollar merger that redefined IBM for a new age, has created a new industry behemoth in Hybrid Cloud Technology.

The addition adds to a company that already possesses incredible strength in cloud platforms. The company saw 19% growth in the sector along the last quarter pushing a revenue of $24 Billion. In addition, Red Had demonstrated a 16% percent growth rate to fuel the fire further. With margin expansion and cash generation a priority for this company, it has great legs to stand on.

In addition, due to the current climate regarding increased competition, the company has been responsive under the direction of new CEO Arvind Krishna pushing to focus on AI and Hybrid Cloud in as unique and focused drivers of growth in the company, better positioning the company for a Trillion dollar industry opportunity.

So where are we today??? Despite all this goodness demonstrated in 3Q 2020, we need to see where we are now…

And, what do we find – Ouch… tough headlines!

However, there are several silver linings in the latest 4th Quarter Report released by IBM… Including great, sustaining returns for Red Hat, solid growth in cloud despite headwinds, and increasing efficiencies where margins are up and debt is going down!

Ultimately, since IBM is a dividend story for us, it is all about the cash flow. And as we see below IBM is working toward a substantial amount of Free Cash Flow.

In the story analysis, we have to be honest, the Analysts have been down on Big Blue for a long time. Continual Forward P/Es in the low 10’s and single digits emphasize this when so many other tech companies in the same sector have been blowing up despite lack of profits (yes we know Amazon and the like are profitable but many are not, just check out Rackspace, and they are given Foreward P/E of near 17)!

Here is a company with strong cred within the sector that has been developing more strength with the likes of Red Hat, and is profitable! Despite a few growing pains we still feel this is a foundational storyline.

2 – By the Numbers

Turning to the numbers now, BCB Cyber loves to follow five specific metrics: Revenue Growth, Forward Price to Earnings Ratio, Return on Assets, Operating Margin, and Debt Considerations. While IBM does have key risk factors we will consider, it does also hit on several other key metrics.

We start with something that stands against the headlines… a solid revenue profile… despite the talk, gross profits remain steady (a minimal decline with headwinds) given the most recent data. In coordination with a slight decline in gross revenue, the cost of that revenue has been adjusted accordingly and it seems like the analysts simply want to ignore this. The result, a consistent gross profit that is still substantial!

Despite a small loss in total revenue, we see that Gross Profits have remained in the mid-$30 Billion range. Cost of Revenue has been minimized accordingly, so while the total has diminished, the efficiency has increased.

Here we clearly see the line from the analysts’ take on IBM, whereby they always discount this company. Perhaps the problem lies not with the company. A solid, lower forward P/E combined with what follows provides us a good buying opportunity.

Here we see the combo realized. Quality, near 10% Operating Margin in the last 12 months, and a solid Return on Assets and Equity, in combo with that lower price and lower Forward P/E in our book lead to a quality opportunity to get good passive income and the potential for new value to emerge as the separation of IBM nears.

One of our “to watch” areas with IBM, the debt is improving as well as the number has come down since our last analysis in November. Plus, with IBM we see a solid cash flow.

Ultimately, still undervalued for a great company, making money with a great dividend and capable leadership, this is a solid play for us. That leads us to our position, which has as you might have guessed increased!

3 – THE BCB CYBER TAKE

As of this morning, on 01.25.21, our own BCB portfolio has a new position of 11.68% with an average cost of $118.30. With the recent dip, we are looking to buy to around 12/12.5% as long as we can keep the price under $119. This builds a solid dividend proportion to our portfolio, bridging high tech and low life value. We are looking to buy again and build! This is definitely a dividend payer worth buying at the right price and one that BCB Cyber believes to be the right fuel for the fire!

Remember, we are just like the masses, struggling to make ends meet and build our future. So, we start building and keep doing our homework. This is just what we need to start us on our journey toward cyberizing our lives. Remember too, never place a market order, only go to the LIMIT! Get exactly the price we set for ourselves!

Remember, as always, think for yourself, do your own homework, and cyberize your life with the best in disruptive tech. Learn more in our Wealth Section and dive deeper into Establishing the Baseline on BCB Cyber.com!