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3 Long-Term Picks That Look Great Despite Iffy Yields

Not all retirement buys have to be stodgy, income-only plays

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NYSE:IBMDividend Yield: 2%
5-Year Average Dividend Increase: 13.6%

We’ll go with the bad news first. IBM (IBM) has been under pressure since April, when it posted an earnings miss. Revenues dipped around 5% on a year-over-year basis, while net income on a comparable basis fell 6%. Additionally, IBM reiterated its expectation of lower full-year 2013 earnings, forecasting $15.53 per share vs. analyst targets of $16.33 per share.

Now, for the good news.

For one, IBM is making an assertive move into the cloud market — especially in lower-end startup and small- to mid-size business applications — to compliment its huge private corporate infrastructure and “meta-data” heavy business model. Most recently, it bought cloud infrastructure provider Softlayer Technologies for $2 billion.

Also, IBM is one of the most consistent repurchasers of its stock. Since 2002, IBM has reduced its number of shares outstanding from 1.703 billion to a current 1.11 billion. Fewer shares help boost EPS, which should help to drive stock prices even when the income statement isn’t pristine.

And the dividend is still alive and kicking. IBM’s most recent increase of 12% puts the quarterly payout at 95 cents per share, and marks the 14th consecutive year IBM has improved its dividend. Despite its weak first quarter, IBM generated $1.6 billion in free cash flow, and sits on more than $11 billion in cash — well in excess of its $950 million dividend payout. At a P/E of just more than 14, IBM is fairly priced for such an attractive, consistent company.

Article printed from InvestorPlace Media,

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