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Tangled up with blue

15 November 2011 By Robert Cole

IBM slips easily into the Warren Buffett investment mould. His reputation was built on such stocks. Somewhat overlooked, the tech-turned-consultancy firm – in which Berkshire Hathaway has amassed an $11 billion stake – boasts a likeable mix of growth and value qualities.

We don’t know for sure how Sage of Omaha reached his decision to invest in Big Blue. It is not a simple case of bargain hunting, though. Berkshire Hathaway built its stake over the last eight months, when IBM’s share price climbed steadily. But the investment could have been made more cheaply in 2010.

At current levels, shares trade at a premium to the market. Using Thomson Reuters Starmine database, the global average forward p/e ratio is 12. IBM trades on a comparable multiple of 14. IBM stock is hardly cheap when judged in terms of dividend yield too. The world average is 2.8 percent, according to Starmine. IBM gives investors 1.5 percent.

Nor does IBM’s earnings outlook set it far apart from the crowd. Analysts’ consensus opinion, according to Starmine, is that IBM will increase earnings 11 percent over the next 12 months. Yet 87 of the world’s 200 largest quoted companies are expected to increase earnings at double digit percentage rates over the same period.

There are relatively few companies, however, that offer a mix of growth and value attributes similar to IBM’s. Even fewer can demonstrate the cash flow characteristics needed to give investors assurance about the sustainability of dividend payments.

In fact, there are only four top 200 quoted companies that match IBM on these growth and value measures. Each are reckoned capable of increasing earnings by at least 10 percent next year and have cash flow cover for their dividend of at least three times. Like IBM, the four are liked well enough to be rated on a forward p/e ratios of between 13 and 15, and give a yield of between 1 and 2 percent.

And they are? Caterpillar, Comcast, Coal India and CVS Caremark.


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