At the time I wrote the initial draft of this article in mid March of 2012, International Business Machines(股票代號: IBM) was trading at $197/share with a total cap of $229 Billion. I have been observing the price movement, and noticed that the recent pull back in May after ex-dividend. The current Net Income is about $16 Billion. Management has reaffirmed the target earning of $20 Billion by 2015. The annual compounded growth rate from $16 Billion to $20 Billion for the next 3 years will need to be at about 7.7%, which is roughly in line with the company’s short and medium term and multiple years growth rate average. Assuming the growth rate fall back to a base line of 3% after achieving the goal of $20 Billion in 3 years, I estimated the market cap today is conservatively $267 Billion, or at least $230.8/share or higher pending on the $7 Billions dollars buyback announced on 4/24/2012.
With management’s dedication to ongoing buybacks, the EPS will sure increase in proportion to the share outstanding reduction on top of the net income growth, and the per share price upward readjustment should follow accordingly. Long term investor would also appreciate the 1.5% dividend, and its dividend growth history. Moreover, if needed, smart management would be wise to consider increase bonds issuance, which IBM already did, if 1)the cost of debt is significantly lower than the cost of equity, 2)the cost of debt is at record low because of the low interest rate environment, 3)the company’s free cash flow generation is strong and more than enough to service and cover debt and interest payment without jeopardizing credit rating.
As a result of the company being currently undervalued by the market, the management’s decision of aggressive buyback is valid and will benefit the existing shareholders tremendously.