Stock Analysis on Net
Stock Analysis on Net

International Business Machines Corp. (NYSE:IBM)

Dividend Discount Model (DDM)

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

Intrinsic Stock Value (Valuation Summary)

International Business Machines Corp., dividends per share (DPS) forecast

US$

Microsoft Excel
Year Value DPSt or Terminal value (TVt) Calculation Present value at 11.41%
0 DPS01 6.63
1 DPS1 5.84 = 6.63 × (1 + -11.84%) 5.25
2 DPS2 5.44 = 5.84 × (1 + -6.88%) 4.38
3 DPS3 5.34 = 5.44 × (1 + -1.92%) 3.86
4 DPS4 5.50 = 5.34 × (1 + 3.04%) 3.57
5 DPS5 5.94 = 5.50 × (1 + 8.01%) 3.46
5 Terminal value (TV5) 188.40 = 5.94 × (1 + 8.01%) ÷ (11.41% – 8.01%) 109.75
Intrinsic value of International Business Machines Corp. common stock (per share) $130.27
Current share price $210.25

Based on: 10-K (reporting date: 2023-12-31).

1 DPS0 = Sum of the last year dividends per share of International Business Machines Corp. common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

Required Rate of Return (r)

Microsoft Excel
Assumptions
Rate of return on LT Treasury Composite1 RF 4.65%
Expected rate of return on market portfolio2 E(RM) 13.79%
Systematic risk of International Business Machines Corp. common stock βIBM 0.74
 
Required rate of return on International Business Machines Corp. common stock3 rIBM 11.41%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rIBM = RF + βIBM [E(RM) – RF]
= 4.65% + 0.74 [13.79% – 4.65%]
= 11.41%

Dividend Growth Rate (g)

Dividend growth rate (g) implied by PRAT model

International Business Machines Corp., PRAT model

Microsoft Excel
Average Dec 31, 2023 Dec 31, 2022 Dec 31, 2021 Dec 31, 2020 Dec 31, 2019
Selected Financial Data (US$ in millions)
Cash dividends paid, common stock 6,040 5,948 5,869 5,797 5,707
Net income attributable to IBM 7,502 1,639 5,743 5,590 9,431
Revenue 61,860 60,530 57,350 73,620 77,147
Total assets 135,241 127,243 132,001 155,971 152,186
Total IBM stockholders’ equity 22,533 21,944 18,901 20,597 20,841
Financial Ratios
Retention rate1 0.19 -2.63 -0.02 -0.04 0.39
Profit margin2 12.13% 2.71% 10.01% 7.59% 12.22%
Asset turnover3 0.46 0.48 0.43 0.47 0.51
Financial leverage4 6.00 5.80 6.98 7.57 7.30
Averages
Retention rate -0.42
Profit margin 8.93%
Asset turnover 0.47
Financial leverage 6.73
 
Dividend growth rate (g)5 -11.84%

Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).

2023 Calculations

1 Retention rate = (Net income attributable to IBM – Cash dividends paid, common stock) ÷ Net income attributable to IBM
= (7,502 – 6,040) ÷ 7,502
= 0.19

2 Profit margin = 100 × Net income attributable to IBM ÷ Revenue
= 100 × 7,502 ÷ 61,860
= 12.13%

3 Asset turnover = Revenue ÷ Total assets
= 61,860 ÷ 135,241
= 0.46

4 Financial leverage = Total assets ÷ Total IBM stockholders’ equity
= 135,241 ÷ 22,533
= 6.00

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= -0.42 × 8.93% × 0.47 × 6.73
= -11.84%

Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × r – D0) ÷ (P0 + D0)
= 100 × ($210.25 × 11.41% – $6.63) ÷ ($210.25 + $6.63)
= 8.01%

where:
P0 = current price of share of International Business Machines Corp. common stock
D0 = the last year dividends per share of International Business Machines Corp. common stock
r = required rate of return on International Business Machines Corp. common stock

Dividend growth rate (g) forecast

International Business Machines Corp., H-model

Microsoft Excel
Year Value gt
1 g1 -11.84%
2 g2 -6.88%
3 g3 -1.92%
4 g4 3.04%
5 and thereafter g5 8.01%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5 – g1) × (2 – 1) ÷ (5 – 1)
= -11.84% + (8.01% – -11.84%) × (2 – 1) ÷ (5 – 1)
= -6.88%

g3 = g1 + (g5 – g1) × (3 – 1) ÷ (5 – 1)
= -11.84% + (8.01% – -11.84%) × (3 – 1) ÷ (5 – 1)
= -1.92%

g4 = g1 + (g5 – g1) × (4 – 1) ÷ (5 – 1)
= -11.84% + (8.01% – -11.84%) × (4 – 1) ÷ (5 – 1)
= 3.04%