IBM (IBM), one of the most storied old-school tech companies in the world, traces its roots to the late nineteenth century. For much of the twentieth century, Big Blue was the global leader in technology, and it helped revolutionize the field of computer science. But what about the twenty-first century? Is IBM stock a sound investment today?
IBM certainly isn’t the undisputed leader in computing like it was back in the 1960s. Companies like Oracle (ORCL), Cisco (CSCO), Microsoft (MSFT), Google (GOOG, GOOGL) and even Amazon (AMZN) have all elbowed into various parts of IBM’s business, forcing the company to narrow its focus and excel at a handful of things.
In recent years Big Blue has shifted its focus away from hardware and toward its “strategic imperatives”: analytics, mobile, cybersecurity, cloud computing and social. Is this new strategy enough to make IBM stock a buy?
Let’s take a look at some of the pros and cons.
Pros of IBM Stock
Value: There’s no denying it: IBM stock trades at an awfully compelling valuation. Shares currently trade at a meager price-to-earnings multiple of 13, and a forward P/E of just 9. For an idea of just how cheap that makes IBM shares, consider that the trailing P/E of the S&P 500 is 20.8, while the forward P/E is 16.4.
IBM stock is also a cash cow and looks even cheaper when you back out the nearly $9 per share in cash it holds on the balance sheet. Backing that out, the trailing and forward P/E for IBM stock is 12.1 and 8.6, respectively.
Dividend: It’s no coincidence that a company with nearly $9 billion in cash on its books also pays a hefty dividend. In fact, IBM stock currently boasts a dividend yield of 3.5%, making it one of the top 10 dividend-paying stocks in the Dow. Not only that, but a low payout ratio of just 33% and 15-straight years of dividend growth mean the payment is both sustainable and growing higher by the year.
Growth in “Strategic Imperatives”: Big Blue realizes that it’s not going to drive growth by focusing on its traditional hardware and software solutions — it has to innovate. The biggest long-term catalyst for the IBM stock price is the growth in strategic imperatives, which includes cloud, analytics, mobile, social and cybersecurity solutions. The company has been successful with these endeavors, and strategic imperatives, which accounted for 13% of revenue in 2010, accounted for 27% of revenue in 2014.
Cons of IBM Stock
Slowing Share Buybacks: IBM has sharply cut down on share buybacks this year, responding to criticism that aggressive share repurchases were being used to prop up earnings per share, misleading investors about the health of the company. After buying back nearly $14 billion in IBM stock in both 2013 and 2014, the tech behemoth kicked off the year by guiding for share repurchases of just $6.3 billion, which would be the lowest level since 2004.
Declining Revenues: Perhaps the most glaring issue facing IBM stock today, however, is the company’s inability to boost revenues. Last quarter marked 13 straight periods of declining revenue, as all of the company’s major business lines saw lower sales. While cloud computing revenue grew at a 50% year-over-year clip, it’s still not a big enough percentage of the company’s business to offset 32% declines in its hardware biz.
Currency Headwinds: To be sure, a strong U.S. dollar isn’t helping Big Blue’s revenue woes. As the greenback strengthens, IBM stock will continue to face currency headwinds due to its global diversification. In 2014, just 45% of revenues came from the Americas, with the remaining 55% coming from overseas. If there are serious issues with China’s economy, that will also hurt the outlook for IBM stock, as more than a fifth of 2014 revenue — 22% — came from the Asia/Pacific region.
Verdict
Even though IBM’s struggles with revenue growth (especially its outsized exposure to the gyrations of the global economy) are worrisome, the pros are extremely compelling.
At today’s valuations, buying IBM stock isn’t a bad idea. Not only does it trade at a discount to the wider markets, but it pays a hefty, sustainable quarterly dividend that will likely keep increasing.
In the long-term, IBM’s strategic imperatives, most importantly cloud computing and its analytics and artificial intelligence arm Watson, should give Big Blue a big leg up over competitors. It’s tough to go wrong having IBM shares in your portfolio.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
