International Business Machines Corp. (NYSE:IBM) has been in the portfolio of legendary investor Warren Buffett for more than two years. As of March, Warren Buffett owned more than 68.12 million shares of IBM with a total market value of more than $14.53 billion. IBM has become his third largest position, accounting for 17.1% of Berkshire Hathaway Inc. (NYSE:BRK.A)’s portfolio. Since the beginning of the year, International Business Machines Corp. (NYSE:IBM) has returned only 2.37% on the market, lagging the S&P 500’s return of 17.86%. Should investors follow Warren Buffett into IBM now? Let’s dig deeper and find out.
Declining in sales but growing in adjusted EPS
In the second quarter of 2013, International Business Machines Corp. (NYSE:IBM) experienced a slight decrease of 3.3% in revenue, from $25.78 billion last year to more than $24.92 billion. The sales of all business segments including Global Technology Services, Global Business Services, Systems and Technology and Global Financing declined. Only the Software segment’s revenue increased by 4.1% to $6.42 billion in the second quarter.
The reported diluted EPS dropped by 13% to $2.91 per share. Excluding workforce rebalancing charges, its adjusted EPS enjoyed the growth of 8% to $3.91 per share. In the second quarter 2013, International Business Machines Corp. (NYSE:IBM) has returned to investors nearly $4.6 billion in cash including $3.55 billion in share repurchases and more than $1 billion in dividends.
IBM stayed a cash cow, generating $2.7 billion in free cash flow in the second quarter, pushing the LTM free cash flow to $17 billion. Despite the sluggishness in sales in the second quarter, the company raised its full-year outlook because of its potential cost savings initiatives and strong software pipelines.
The non-GAAP EPS for the full year is expected to come in at least $16.90 per share, excluding the impact of a $1 billion restructuring charge on job reductions. International Business Machines Corp. (NYSE:IBM) is trading at $194.50 per share, with the total market cap of around $215.7 billion. The market values IBM at 10.6 times its forward earnings.
Peer comparisons
Compared to its peers, Accenture Plc (NYSE:ACN) and Oracle Corporation (NYSE:ORCL), IBM does not seem to be expensively valued.
Accenture Plc (NYSE:ACN) is trading at $75.20 per share, with the total market cap of around $48.50 billion. Accenture Plc (NYSE:ACN) has the highest forward earnings valuation, at 16.7. For the full year Accenture lowered its revenue growth guidance from a 5%-8% range to a range of 3%-4% in local currency. It also narrowed its EPS guidance from $4.89 – $4.97 to $4.90 – $4.94.
Despite the sluggish third quarter earnings results and lower outlook for the full year, its Chairman and CEO Pierre Nanterme was still bullish about the company’s future noting its overall profitability, EPS growth, operating margin expansion and a strong balance sheet. Accenture offers its shareholders a decent dividend yield at 2.1%, a bit higher than the dividend yield of 2% at International Business Machines Corp. (NYSE:IBM).
Oracle Corporation (NYSE:ORCL) has the lowest valuation of the trio. It is trading at $32.20 per share, with the total market cap of $149 billion. The market values Oracle at around 10.2 times its forward earnings.
In the recent fourth quarter earnings results, Oracle Corporation (NYSE:ORCL) was hit hard in the hardware business with a decline of 9%. However, its software business revenue increased 4%.
For the full year, the company has generated $14 billion in operating cash flow, increasing its cash position to as much as $32 billion. Looking forward, Oracle plans to return around $12 billion in cash to shareholders in a form of share repurchases, creating a total yield of 9.55% (1.5% dividend yield and 8% buyback yield) for shareholders.
Both IBM and Oracle are global leaders in IT service industry, serving a diverse customer base. When I talk to a lot of people in the IT field, I realize that both companies have quite a high level of customer loyalty. Their customers tend to be quite sticky after they use IBM or Oracle software/systems. The customers’ loyalty will provide sustainable recurring revenues for both companies in the future.
My Foolish take
Investors might get excited about International Business Machines Corp. (NYSE:IBM)’s plan to return cash to shareholders. Personally, I like both IBM and Oracle with their global leading positions in the technology industry, high customer loyalty and the high potential yield coming from their potential cash returns to shareholders.
The article Juicy Potential Yield From IBM originally appeared on Fool.com and is written by Anh Hoang.
Anh HOANG owns shares of Oracle. The Motley Fool recommends Accenture. The Motley Fool owns shares of International Business Machines. and Oracle. Anh is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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