Sunday, August 25, 2013

Recent Buy

Ahhh...you know what that sound is?  It's me enjoying making a purchase for my FI portfolio after about 1.5 months.  It's a shame too because there's several positions that I'd like to be adding to right now but capital is pretty light due to the pending house purchase.  All will be well though once September rolls around and I can build my emergency fund to the level I feel comfortable and start investing the rest.  I initiated a new position on Friday by purchasing 10 shares of International Business Machines (IBM).

I picked up the shares for $184.97 each which gives me a cost basis of $185.77 after commission.  Ouch.  It wasn't a steal of a price as my cost basis is around 6.5% higher than my target entry price but it was at least 7.8% lower than the average valuation price of $201.64.  These shares will provide $38.00 in annual dividends based on the current annual dividend rate of $3.80 and carry a yield on cost of 2.05%.  I'll typically aim for a higher current yield but I wanted to add a higher dividend growth company so I made an exception to the yield in order to buy some IBM.

My main concern about this purchase is that IBM won't be able to continue to innovate, but they've been around forever and have gone through tough times where products and revenue were flat and eventually came out ahead.  With their server capabilities I think they'll do just fine as more and more data is consumed by society requiring the hardware behind the scenes.  For a technology company they have a quite impressive streak of 18 years of dividend growth and I expect to see the dividend growth continue at over 10% annual increases for the next few years even if revenue continues to be flat.  Over the last 5 years their FCF after paying out dividends has average over $11.9 billion, so there's clearly room to still increase the dividends without affecting the cash flow of the company.

You can check out my recent stock analysis on IBM here and the rest of the companies I've looked at here.

My forward 12-month dividends now sit at $2,889.17 which is 82.6% of the way towards my goal of $3,500 by the end of 2013.  My FI Portfolio's YOC is now at 3.37%.

I've updated Portfolio page to reflect this purchase.

8 comments:

  1. I like IBM but have strayed due to a lower dividend and my large position in another tech giant, INTC. Good luck with the new house purchase, it can be really exciting to house shop.

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    1. AAI,

      I wanted to get a better tech play than INTC as I don't think IBM has as many headwinds as INTC. I think this purchase brings some balance to my tech exposure so I'm happy with that. I was fine with the lower dividend because I expect the DG to still be over 10% for the next few years and wanted a bit of a lower dividend/higher growth pick to balance the middle dividend/middle growth stocks that are the majority of my portfolio.

      Well if we could just get to closing I'd be happy. We're in the stasis period between the option ending and closing and I'm anxious to close and get into the new house. Well, I'm not too anxious to close as that's going to be about $48k in cash leaving my coffers.

      Thanks for stopping by and have a great rest of the weekend.

      Delete
  2. Pursuit,

    Great buy here. I've not historically been a big fan of IBM. But after taking a look at them over the last couple weeks I'm quite enthusiastic about it at today's price. The yield isn't blockbuster, but coupled with the dividend growth and the 2015 plans to get to $20 EPS, double-digit returns are very likely for the next few years.

    Sorry to hear about almost $50k leaving your account. As a fellow frugalist and aggressive equity investor, that would give me a headache. Haha! But, I know you and your wife are going to love being in your new house. Best of luck with moving in. :)

    Best wishes!

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    1. DM,

      While they still need to innovate to stay ahead, their innovation is more through their software/services divisions and not necessarily through advancing the hardware, although they do still work on that. I really like their exposure to big data and to healthcare to compile data and recommend treatments. I can't remember if it was in the annual report or if I had read it somewhere else, but one of IBM's healthcare solutions is about analyzing a patient's history and comparing with other in order to determine the proper treatment route for certain cancers. Their system came up with an 80% success rate on picking the right combination of drugs/chemo or what have you, whereas doctors were only 50%. That could be a boon in cost savings for individuals by getting the right treatment at the right time rather than just kind of guessing and seeing what happens, then changing course if need be. Plus patients can recover quicker and overall be happier.

      Luckily I didn't have to divest any of my actual FI portfolio and just used HAL shares and savings for the down-payment. But it still hurts to see it leave. That's $1,440 in annual dividends I could be receiving with a 3.0% YOC. That's $120 per month. I'll get some pictures up when we get all settled in.

      Thanks for stopping by and have a great week!

      Delete
  3. IBM is risky. Price to book value is very high at 11.50. Debt is very high at Debt/Eq 1.92 The price could fall precipitously.

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    1. Anonymous,

      I don't think IBM is really the kind of company you can value based off book value seeing as how they are essentially a services company so the book value is going to be low. P/B is traditionally used to value financial related stocks. While I don't necessarily like the debt/equity, the actually company debt isn't nearly as bad. If you check the article I linked to the debt is about 1/7th IBM debt and 6/7th's other companies, although IBM is fronting the costs so they are still tied to it. Given the wide moat nature of their business and very high switching costs, IBM essentially builds systems and services to optimize everything within a clients business, I'm willing to overlook some of the faults. I'm more worried about the revenue growth stagnating over the last 10 years.

      Thanks for the concern, this is what I like about the pf/investing blog world. Everyone can bring up their own concerns for an open discussion. For me I'm willing to take the risk because they could suspend the buyback one year and use their FCF after dividends and the buyback money to retire all the debt.

      Thanks for stopping by!

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  4. Good purchase PIP especially managing it in the middle of your house settlement. I have not yet made a single purchase for the FI account as I am too heavily invested in some property projects. Once the drain from those stops I will get stuck in. I am also wrangling with tax structures and getting the right shelter setup for our investments. Any purchase that you can see 'hey, that's $38 I don't have to earn this year or the next or the next etc' is bound to be a great motivating factor. Companies with long term growth prospects always pull through, I like that IBM has a business model not too focused on technical innovation. It chooses to work in servers, services and back office functions, these can have a much higher cashflow generating capability when compared to hardware/manufacturing companies and are harder to replicate/compete with.

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    1. KM,

      I wasn't planning on making any purchases, but bought IBM and V. I had originally left the full $4,500 in my brokerage account to cover the open put on O that should be exercised, but then I took a look again and the option doesn't expire until December, I was thinking October. So I feel okay with using some of that capital now and holding less for the margin requirements. Although now I'm stuck with making no purchases until probably the middle of next month. Property can really be a big burden on your finances but if you plan properly then it should be fine. In the long run waiting another month or so to invest again won't make a big difference.

      I like IBM because they aren't as heavily tied to technological innovation. It's much more service related than I expected which as you mentioned is usually better cash flowing since there's not the large capex required. They're cash flow is absolutely ridiculous, as I mentioned in a previous comment they've average $11.9 billion in FCF after paying dividends. And the ratio of buybacks to dividends is around 3.5:1.

      Thanks for stopping by!

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