Before there were tech giants like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), there was International Business Machines (NYSE:IBM). An investment in IBM stock might just be a better investment that any of those “new” giants.
IBM doesn’t attract an enormous amount of interest from investors lately, partly because the stock has been treading water for most of this decade. But the company’s balance sheet has been showing steady improvement over the last year.
IBM’s revenue numbers started to show a major upswing toward the end of 2017. The firm has now reported three consecutive quarters of growth. Earnings per share have also been moving in a positive direction, currently coming in at around $13.80 with a consensus that they will likely top $14 per share in 2019.
Source: Statista
IBM may be an old name in the business world, but that can be a plus: it has a network of relationships with other companies that goes back decades. A recent survey of IT executives showed considerable demand for IBM services, especially artificial intelligence and cloud computing products.
Productive Partnerships
Retail giant Walmart (NYSE:WMT) announced just days ago that it would require some suppliers to use IBM’s blockchain to track food through its supply chain. If other big sellers follow Walmart’s lead on this, it will mean a significant boost for IBM revenue.
Over the summer, IBM made a $500 million, 10-year cloud computing deal with Banca Carige of Italy, and a similar pact with KMD of Denmark. In the U.S., Exxon Mobil (NYSE:XOM) is among the American firms transferring their data files to IBM’s cloud. That cloud computing business generated $18.5 billion of revenue over the past 12 months. Much of the company’s growth is being driven by IBM’s “strategic imperative” businesses, which now account for about half of the company’s sales.
Strong Yield and Buybacks
There are some possible negatives to be aware of. A lot of IBM’s revenue comes from overseas, so a stronger U.S. dollar could inhibit the company’s growth plans. Many analysts believe, however, that currency risk is already priced into the stock.
Keep in mind that IBM stock yields more than 4%, so in addition to the potential for capital appreciation driven by earnings growth, it can also offer substantial income.
And, as my InvestorPlace colleague Ian Bezek reminded readers a few weeks back, the company buys back a ton of stock. Dating back to 2004, IBM has retired at least 2% of its total shares outstanding each and every year. Add that to the dividend, and shareholders are getting a high single-digit return just from IBM’s capital return program alone, he posited.
With all these advantages, the stock is only trading at about 24 times current earnings, noticeably less than comparable tech firms. IBM’s days of being overlooked may be drawing to a close.
The author does not own any of the stocks mentioned in this article.
