Tuesday, August 12, 2014

Second & Third Picks in WMD Portfolio - GlaxoSmithKline & IBM

The more real they are, the more fun blogs are to follow. So in that spirit, rather than talking about ideas in the abstract I maintain a hypothetical portfolio to track ideas where I'll semi-regularly (and hypothetically) invest and track buying (and where required selling) shares.

For tracking purposes I will use $1,000 to keep it nice and simple. The overall goal is long run income and dividend growth. Portfolio page with goals and tracking is here.

The first pick was Coca Cola, today I am "adding" two other great dividend payers - GlaxoSmithKline and IBM.

Its very hard to find a 5+% dividend yield today from a high quality operation, but that's what GlaxoSmithKline offers. The current yield is 5.5% albeit with moderate growth (6.6% five year annualized dividend growth).

IBM's forward dividend yield is 2.4%, that is not super high but still well above the overall market. Since their payout ratio is 25%, it can grow comfortably for many years. IBM management is willing to raise the dividend with five year annualized dividend growth at 14.3%. Its as high quality a company as there are anywhere in the world. The 5 year average ROE is 75% all for a very good price, the trailing P/E is 12. About the only negative on IBM's metrics is that debt has risen to do buybacks, but at this price point is surely makes sense and the company can cover its payments.

Debt/Equity 2.4 2.0
Payout ratio 81% 25%
Fwd Dividend Yield 5.6% 2.4%
5 yr Div Growth 6.6% 14.3%
ROE 5 yr avg 58% 75%
Trailing P/E 14 12
(Source: Morningstar)

These companies are not perfect, both have higher debt loads than you would like. Glaxo's payout ratio is a bit too high. However, they both should have no problem meeting their debt obligations. One metric for selection I use is a 5+5 metric - dividend yield plus dividend growth should be 10 or higher. Both GSK (12.2) and IBM (16.7) clear this hurdle with room to spare. The quantitative side looks excellent; however there are qualitative reasons why Glaxo and IBM are priced cheaply and I will explore these in future posts.

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