Thursday, October 10, 2013

Dividend Compass Match 3- IBM vs Microsoft

In Match 2 of the Dividend Compass Cup, we had Exxon Mobil beating out Royal Dutch Shell.

In Match 3, IBM squares off with Microsoft. The Dividend Compass Cup rules are straightforward, we run the two quality, wide moat companies through the Dividend Compass to analyze which is the more interesting investing candidate. Todd Wenning's Dividend Compass scores them 1-5.

This matchup focuses us on what was historically a very unlikely place to hunt for income investments - the tech sector. Tech companies do not have a reputation as dividend payers, but look at Cisco paying 3% and Intel paying 3.9% yields. There are lots of interesting income ideas in tech, including this match - IBM (IBM) and Microsoft (MSFT).

IBM paid its first dividend all the way back in 1913. IBM has paid a quarterly dividend each quarter since 1916 and increased its dividends for the last 18 years. Clearly the dividend matters to management.

Microsoft's own dividend journey began more recently, the company initiated its dividend in 2003 whilst sitting on around $40B in cash. Let's see how these two companies stack up to the Dividend Compass.

IBM has put up excellent numbers like clockwork. Its dividend yield is low which makes hitting the coverage mark easier. Another thing that makes coverage easier is eye popping (and buyback enhanced) Return on Equity north of 70%.

IBM metrics:

Sales growth aside, these metrics are as good or better than anything we have seen so far in the Dividend Compass Cup. And the scoring backs this up to the tune of a 4.85 five year average score.

IBM score:

I must say when I look at the numbers above its hard to imagine any company beating that, its close to perfection at least where Dividend Compass is concerned. Let's see how Redmond answers.

Microsoft Metrics:

Microsoft gets over every hurdle with room to spare. Its last three years do not contain any missteps. Two consecutive fives in 2013 and 2012.

Microsoft score:

Going off of the 5 year averages this one is really too close to call IBM comes in 4.85 and Microsoft at 4.83. So far the Dividend Compass has delivered clear winners on a 5 year time scale, here we are in rounding error territory and so a judgement call is in order. IBM has history on its side and a very slight 5 year advantage, however Microsoft (3.3% dividend) pays a far higher current yield than IBM (2.1%)...and that is good enough for victory in this case. Congratulations Steve Ballmer, you may be retiring but at least you will be able to savor a victory in the Dividend Compass Cup.

Next up Match 4, CH Robinson versus Ritchie Brothers Auctioneers.

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