IBM Is Worth Considering After The Company’s Reorganization

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Legacy technology giant International Business Machines (NYSE:IBM), better known as IBM, has come through the tech wreck of the past few months relatively unscathed. IBM stock has proven to be more resilient than many analysts and investors previously thought.

Quantum computing stocks: Sign of IBM with Canada Head Office Building in background in Markham, Ontario, Canada. IBM is an American multinational technology company.

Source: JHVEPhoto / Shutterstock.com

Year-to-date (YTD), IBM stock is down 5% to $127. That’s much better than the 15% YTD decline in the benchmark Nasdaq index and a stronger showing than other technology giants. Household names such as Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) are both down 12% YTD, and Oracle (NYSE:ORCL) is down 10% so far in 2022.

Other, less-established technology stocks have fallen 50% or more since the market peaked last November. Yet IBM shares are trading where they were six months ago compared to a much larger rout that has left many investors with big losses.

IBM’s New Business Model

To be sure, IBM stock has not been a great long-term investment over the past decade. The share price is down 31% since late 2012, when it was trading right around $185.

However, the company appears to have turned a corner — or, at the very least, it stopped the bleeding — thanks to a new business model. Last November, just prior to the stock market downturn, IBM effectively split its business in two. The main company that retained the IBM name, brand and dividend is now focused on profitable, high-growth areas such as cloud computing, data security, artificial intelligence and blockchain networks.

IBM’s less-profitable legacy infrastructure services business designed, built and managed information technology systems for more than 4,000 outside companies using an army of consultants. It was spun off into a new, publicly traded company called Kyndryl (NYSE:KD).

Since its market debut last fall, KD stock has plummeted 59% to $13 per share. Meanwhile, IBM stock has largely managed to keep its head above water during the market downturn. The offloading of its increasingly antiquated IT systems and consulting business has allowed IBM to keep its shares above water while Kyndryl has sunk.

Other Positives for IBM Stock

The separation already appears to be benefiting the company and its shareholders. However, there are other reasons to like IBM stock, including its robust dividend.

The company has reliably increased its dividend payout every year since 1996. The result is that today, IBM has a dividend yield of 5.2%, placing it among the top 10 S&P 500 companies with the highest payouts.

IBM’s dividend is among the most generous of technology stocks, placing it in the same category as oil majors and some of the larger real estate investment trusts (REITs). It currently equates to a quarterly payout of $1.64 per share.

The dividend is certainly attractive and partly makes up for the underperformance of IBM stock over the last decade. However, IBM is also producing strong earnings that are largely driven by its cloud computing unit.

In the fourth quarter of last year, IBM’s revenue grew 7% year-over-year (YOY) to $16.7 billion. That marked a big improvement from Q4 2020, when the company’s revenue declined 6%.

For all of last year, IBM’s revenue amounted to $57.4 billion, a 4% annualized increase. The company has forecast mid-single-digit revenue growth annually through 2024, and it expects to have cumulative cash flow of $35 billion over that period.

IBM Stock Is Worth Considering

After years of chronic underperformance, IBM shares appear to have renewed strength following the spinoff of its legacy IT infrastructure business. The focus on fast-growing areas, such as cloud computing and blockchain, seems to have injected some life into the company and fortified its stock.

Investors should like that IBM continues to offer one of the best dividend payments available. Its financials have also improved, with its revenue growth moving in the right direction. For all these reasons, consider adding IBM stock to your portfolio.

On the date of publication, Joel Baglole held a long position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.  

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.

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