How To Buy This Blue Chip Dividend Stock 9% Below Its 52-Week Low

by Robert Hauver

One of the world’s most venerable blue chip dividend stocks, International Business Machines, (IBM), has gotten hammered by the market, since hitting a high of over $213.00 in March, and is now very oversold:

IBM-CHART8-23-13

IBM’s disappointing second quarter 2013 earnings report in late June didn’t help matters – sales and earnings were both down. One bright spot was that estimated services backlog at June 30 was up 3% year over year.

IBM-Q2-13QTR

Earnings Forecast 2013-2014: The average analyst EPS growth forecast for IBM in 2014 is currently 8.52%, giving it a 1.46 2014 PEG value, so we can’t say it’s undervalued on a growth basis:

IBM-AUG-PEG

However, on a P/E and Price/Sales basis, it does look cheaper than its Industry’s averages. Part of IBM’s problem has been the slowdown in Europe, but, it looks like that area may finally be pulling out of its recession in the next few quarters.

IBM-AUG-PB

Dividends: IBM has had a good dividend growth rate over the past 5 years, and increased its quarterly dividend again in May, to $.95, from $.85.

IBM-AUG-DIV

Thinking long term: Is a dominant company like IBM going to fade away? We don’t think so. Neither does Mr. Long Term himself, Warren Buffett- he’s a major buyer of IBM, having bought shares since Q3 2011, through Q2 2013. IBM is now Berkshire Hathaway’s 3rd largest holding, at 14.62% of its portfolio.

How to play it safe with long-term put options: If you’re leery of IBM falling further, your best bet may be to sell cash secured put options below IBM’s share price. We’ve laid out a January 2015 put trade below, which gives you a breakeven cost of $166.40, which is over 9% below IBM’s 8/23/13 share price of $185.16. The Jan. 2015 $185.00 put option pays well over 3 times what IBM’s dividends will pay over the next 17 months. (Please note that, unlike covered call sellers, put sellers don’t receive dividends.)

You can find more details on this and over 30 other put trades in our free Cash Secured Puts Table:

IBM-AUG-PUT

We also list a covered call trade for IBM, along with over 30 other covered calls trades, in our free Covered Calls Table.

Financials: Thanks to its ongoing stock buyback program, IBM has a very high Return On Equity ratio of over 83%. Its Operating Margin is also much higher than industry averages. It carries more debt, but it has a strong Interest Coverage figure of 41.85:

IBM-AUG-ROE

Performance: IBM is just 1.43% over its 52-week low, as of 8/23/13. As we’re heading into the market’s weakest months, Sept. and Oct., it may go lower, and offer even more compelling, higher put-selling yields and lower long term breakevens.

IBM-AUG-PERF

Author: Robert Hauver, copyright 2013 DeMar Marketing, All Rights Reserved.
Disclosure: Author was short IBM put options at the time of this writing.
Disclaimer: This article was written for informational purposes only. Author not responsible for any errors, omissions, or actions taken by third parties as a result of reading this article.