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Juicy Potential Yield From International Business Machines Corp. (IBM)

International Business Machines Corp. (NYSE:IBM)Note: This article has been edited to remove incorrect data on IBM’s dividend and share repurchase program.

International Business Machines Corp. (NYSE:IBM) has been in the portfolio of legendary investor Warren Buffett for more than two years. As of March, Warren Buffett owned more than 68.12 million shares of IBM with a total market value of more than $14.53 billion. IBM has become his third largest position, accounting for 17.1% of Berkshire Hathaway Inc. (NYSE:BRK.A)’s portfolio. Since the beginning of the year, International Business Machines Corp. (NYSE:IBM) has returned only 2.37% on the market, lagging the S&P 500’s return of 17.86%. Should investors follow Warren Buffett into IBM now? Let’s dig deeper and find out.

Declining in sales but growing in adjusted EPS

In the second quarter of 2013, International Business Machines Corp. (NYSE:IBM) experienced a slight decrease of 3.3% in revenue, from $25.78 billion last year to more than $24.92 billion. The sales of all business segments including Global Technology Services, Global Business Services, Systems and Technology and Global Financing declined. Only the Software segment’s revenue increased by 4.1% to $6.42 billion in the second quarter.

The reported diluted EPS dropped by 13% to $2.91 per share. Excluding workforce rebalancing charges, its adjusted EPS enjoyed the growth of 8% to $3.91 per share. In the second quarter 2013, International Business Machines Corp. (NYSE:IBM) has returned to investors nearly $4.6 billion in cash including $3.55 billion in share repurchases and more than $1 billion in dividends.

IBM stayed a cash cow, generating $2.7 billion in free cash flow in the second quarter, pushing the LTM free cash flow to $17 billion. Despite the sluggishness in sales in the second quarter, the company raised its full-year outlook because of its potential cost savings initiatives and strong software pipelines.

The non-GAAP EPS for the full year is expected to come in at least $16.90 per share, excluding the impact of a $1 billion restructuring charge on job reductions. International Business Machines Corp. (NYSE:IBM) is trading at $194.50 per share, with the total market cap of around $215.7 billion. The market values IBM at 10.6 times its forward earnings.

Peer comparisons

Compared to its peers, Accenture Plc (NYSE:ACN) and Oracle Corporation (NYSE:ORCL), IBM does not seem to be expensively valued.

Accenture Plc (NYSE:ACN) is trading at $75.20 per share, with the total market cap of around $48.50 billion. Accenture Plc (NYSE:ACN) has the highest forward earnings valuation, at 16.7. For the full year Accenture lowered its revenue growth guidance from a 5%-8% range to a range of 3%-4% in local currency. It also narrowed its EPS guidance from $4.89 – $4.97 to $4.90 – $4.94.

Despite the sluggish third quarter earnings results and lower outlook for the full year, its Chairman and CEO Pierre Nanterme was still bullish about the company’s future noting its overall profitability, EPS growth, operating margin expansion and a strong balance sheet. Accenture offers its shareholders a decent dividend yield at 2.1%, a bit higher than the dividend yield of 2% at International Business Machines Corp. (NYSE:IBM).

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