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International Business Machines (IBM:NYSE) has broken into new 52-week highs consistently in May.
Its share buyback programs, acquisition activity, and dividend increases continue to increase its earnings potential through to 2010.
IBM is still an undervalued tech giant even at $106 per share.

Information Technology Stocks: IBM Still Offers Fantastic Value for Tech Investors

International Business Machines (IBM:NYSE) has always been a tech giant, a representative of the entire technology sector.

Granted, for a while, the stock didn't do so well. It was worth as low as $72.73 per share back in July 2006. And if you take a look at the company's daily chart from 2003 to just this past April 2007, you'll see that IBM went nowhere for a long time, oscillating between $80 (give or take a few greenbacks) and $100.

IBM is part of the Diligent Investor portfolio. We've held it for exactly a year this month. And boy, were subscribers lucky. They were able to buy in at the lowest it's been since around $80 per share.

Since it's part of the portfolio, I pay a lot of attention to it. Not only do I think it's a tech giant that is well worth keeping in the portfolio, but it's also a dividend-paying stock. In late April, IBM announced that it was increasing its dividend by 33% from 30 cents to 40 cents, an annual yield of 1.6% on the stock per year from its current price. It also announced a stock buyback plan increase to $16.4 billion, which from its current price is about 154 million shares at their current trading price of $106 per share.

It's not coincidence that IBM has hit three new 52-week highs, the most recent being $108.05 in May. I call this kind of action a “Bonus Booster Strategy” which I've started employing in Diligent Investor. Primarily, it's pinpointing the stocks that consecutively increase their dividends before they announce the next dividend increase… and riding the momentum up.

So far this has worked well with IBM: Diligent Investor subscribers are up 32% on the Dow 30 company since a year ago.

Information Technology Stocks: 7% Growth On An Annual Basis

IBM has a lot of potential going forward over the next few years. Analysts have examined their earnings growth, and expect, at an extreme, 16% compounded growth by 2010. Even a conservative 12-14% growth according to analysts fares well for the company whose official statement expects 10-12% earnings targets.

Not taking into account acquisitions, but definitely taking into account the company's buybacks (as well as dividend payouts to loyal shareholders), the expectation is as high as a growth rate of 2.5% on top of its current average of 3%. When taking into account acquisition growth, it could see another 1.5% on top of that.

That's a growth of 7% per fiscal year.

The company that makes $91.4 billion in revenues on an annual basis, has gone from thinking big to thinking small, focusing on mid-size and smaller company solutions. On top of its own organic initiatives, the company's inorganic growth through acquisitions ($16 billion in the last five years has been spent on 60 company absorption targets) will continue to add fuel to this tech behemoth's fire.

And in lieu of market conditions that foster merger and acquisition activity, this could only make IBM a more desirable investment going forward.

Personally, I feel that IBM is still undervalued at $105 per share.

I'm placing a $150 per-share target, taking into account its cyclical nature, by 2010.

Ann

P.S. Tween Brands Inc. (TWB:NYSE) is announcing its earnings tomorrow at 9:00 a.m. If you're holding TWB due to my free recommendation of it here in Market Report as a great way to play Generation Y's increasing spending habits, keep an eye out for its announcement tomorrow.

***

Ann Sosnowski is a small and mid-cap stock analyst for Taipan Financial News. She is the editor of Diligent Investor, a monthly newsletter that balances conservative and moderately risky investments that pertain to current market trends. She is also the editor of Diligent Investor Micro-Cap Hot Sheet, a monthly newsletter that finds the hottest penny and micro-cap stocks on the market.

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Related Resources
Information Technology Stocks: IBM Becoming a Growth Machine (via Barron's)
Information Technology Stocks: International Business Machines (IBM:NYSE)
Information Technology Stocks: Technology Updates (via Forbes)