International Business Machines Corp. Has 2 Attractive Faces

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IBM stock - International Business Machines Corp. Has 2 Attractive Faces

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Whenever you bring up the subject of International Business Machines Corp. (NYSE:IBM), you’re liable to receive groans and blank stares. Groans from the older crowd, who grew up admiring the iconic, once unstoppable company, that is now mired in seeming irrelevancy. Blank stares, of course, come from the Millennials and younger, who may not have heard of IBM, and therefore, are unlikely to invest in IBM stock.

Even the biggest proponent of the blue-chip stalwart has to admit that the firm has seen better days.

Over the trailing 10-year period, the IBM stock price has gained only 41%. Granted, nobody is buying shares in the hopes that it will pull a bitcoin. Still, it’s a pretty rough performance. Additionally, new investors who bought in five years ago are staring at a 20% loss.

Some of the IBM news items also must be taken with a grain of salt. For instance, the markets responded positively to the company’s recent third-quarter earnings beat. But was the performance really that impressive? Our own Luke Lango didn’t think so, noting that the sexy part of IBM’s business, Strategic Imperatives, accounts for only 45% of the total revenue picture.

Strategic Imperatives is where you’ll find the lucrative markets of cloud, network security, and data analytics. Naturally, as we move deeper into the 21st Century, you want a tech company to focus strongly on these areas.

On the flipside, the IBM stock price is finally showing some promise after succumbing to bearish pressure earlier this year. Since August 18, shares are up 11%, generating for the company what would be considered serious momentum.

More importantly, several tantalizing pieces of IBM news exist that could positively impact shares. You just have to know where to look.

No Need To Overcomplicate IBM Stock

InvestorPlace contributor Will Ashworth made what I found to be a surprising argument: A higher rising IBM stock price doesn’t depend on technology. It’s a counterintuitive argument, given that the firm has run multiple advertisements featuring their artificial-intelligence platform, Watson. Ashworth writes:

“As I stated in my October article, the key to IBM stock has little to do with technology and everything to do with free cash flow.

Blankenhorn sees IBM as overvalued, and time could prove him right.

I see a business that is still generating a lot of free cash flow. Maybe not as much as it once did, but until that isn’t the case, income investors ought to at least consider IBM stock for their portfolio because its 3.9% dividend yield is one of only 94 S&P 500 stocks yielding more than 3%.”

In that light, Ashworth’s argument makes complete sense. Although the economy is much improved against recent years, not too many companies are clamoring to offer robust dividends. With what IBM yields now, it doubles the passive income potential of the S&P 500. Just as importantly, the 10-year treasury yield is 2.4%, which makes IBM stand out even more.

Plus, based on IBM’s free-cash flow metric, the firm has the financial stability to keep churning out its dividends. That also implies that, as Ashworth later suggests, the company is, at worst, fairly valued. Thus, the IBM stock price will likely not fluctuate too far to the downside.

IBM Stock Has Potential

I think any reasonable investor looking to protect his portfolio against future uncertainties should at least consider IBM stock. Despite having a boring reputation, it’s a stable organization that will absolutely do business for years to come. The only thing I would add to Ashworth’s argument is that I believe IBM is about the technology.

Like humans, as a corporation ages, the more set in its way it becomes. It takes tremendous effort to break out of your comfort zone, which is what IBM is actively doing.

When I was a kid, IBM was synonymous with top-of-the-line computer hardware. Now, it’s about leveraging AI to predict repair maintenance schedules, or to help find effective pricing for a marketing team. As my colleague Chris Lau explains, the company’s aggressive investments into next-generation technologies puts it in the same sector as relevant firms Microsoft Corporation (NASDAQ:MSFT), Oracle Corporation (NYSE:ORCL) and many more.

Certainly, management has some work to do. They have yet to fully make the transition from old IBM to new IBM. But given its vast resources and storied history, I’m more than inclined to give them a shot.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/international-business-machines-corp-ibm-stock-two-attractive-faces/.

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