International Business Machines
- Market value: $132.3 billion
- Dividend yield: 4.5%
A strong third-quarter earnings report from International Business Machines (IBM (opens in new tab), $147.64) in October sent shares up 6%. Although welcome, it feels like Lucy might be yanking the football from Charlie Brown. Again. We’ve been here before. IBM has been in the doghouse since 2016. That’s a lot of yield for investors, but not much growth. Shares of IBM, at about $147, are still below where they started 2018. Hey, they don’t call them the Dogs of the Dow for nothing.
Keep in mind that a decade ago, revenues at IBM were $105 billion, and last year they were $57 billion. It’s not that they’re caught up selling obsolescing “Big Iron” from a generation ago, but rather shedding lots of businesses and defining their core which now consists of software, consulting and IT infrastructure. There’s some chatter that its IT infrastructure group, which accounts for about 25% of total revenue, could be divested, which would take a good chunk out of the $61 billion in 2023 forecasted revenues.
For investors, that leaves software and consulting as the businesses to watch, which were up 7.5% and 5.4%, respectively, in the last quarter. The core markets these businesses address – cloud computing, consulting and hybrid AI – are growers. Global IT spending is anticipated to rise to $4.6 trillion in 2025, up 5% over 2022, according to research firm Gartner. IBM is poised to increase revenues from this spend, and in this respect, there is an achievable and sustainable path to growth. However, this growth is likely to be slower and steady rather than rapid and meteoric. After all, Alphabet’s (GOOGL (opens in new tab)) Google and Microsoft (MSFT (opens in new tab)) are swimming in the same pond.
Net-net, it’s possible that IBM will spend another year in the doghouse. However, waiting it out with a 5% yield, and the financial strength to maintain it, may prove to be alluring for many investors.
As a footnote, IBM did show an operating loss of $3.2 billion during the last quarter, which might give pause. This loss was attributable to a change in pension operations, resulting in a $6 billion charge that had no impact on the company’s cash. For the trailing 12 months ending the third quarter, IBM had free cash flow – cash from operations less capital expenditures – of $7.4 billion, more than three times the $2.1 billion in dividends paid.
With a lot of overseas business, the historically strong dollar currently delivers a big hit to IBM’s revenues, and growth is better than the reported numbers. In its latest earnings report, IBM said it expects revenue growth “above its mid-single digit model,” with currency translation presenting a seven percentage point hit.
IBM’s core markets in cloud computing, consulting and hybrid AI, are growing, so there is a path to earnings growth, but with a single digit forecast, it’s not going to be fast.