International Business Machines (NYSE:IBM) is a legendary technology company with a history of more than a century. IBM was incorporated in 1911, a blue-chip stock and is an icon in the IT services industry and technology sector. However, Not all blue chips are attractive to invest in. The reason is simple: some of them may have severe risks or may be overvalued. IBM stock at the price level near $129 presents an attractive opportunity although it has its risks. The most severe risk being a high level of debt.
IBM is among the prolific list of companies that have stopped their business operations in Russia due to its invasion of Ukraine. This is bad news for sales. But external shocks like this unprecedented war often lead to some tough decisions.
I like IBM stock for three key reasons: its strong fourth-quarter 2021 earnings results, its dividend yield and its valuation.
Revenue Growth for Most Business Segments
IBM reported strong Q4 2021 financial results with a year-over-year increase of 6.5% in revenue to $16.7 billion and a 2.8% increase of gross profit to $9.5 billion. The results also showed a 107% increase in net income to $2.5 billion, and 106% increase in diluted EPS to $2.72.
Most of the business segments showed positive revenue growth but there are a few exceptions including: Security, Infrastructure, IBM Z, Infrastructure Support and Financing. All showed negative revenue growth. The good news is that Hybrid cloud revenue in Q4 2021 increased for the full-year 20% to $20.2 billion.
“We increased revenue in the fourth quarter with hybrid cloud adoption driving growth in software and consulting,” said Arvind Krishna, IBM chairman, and chief executive officer. It is obvious that IBM is giving a lot of importance to the hybrid cloud, and it turned out that it performed very well.
IBM is now under a major enterprise digital transformation and its software and consulting business showed momentum with revenue growth of 8% and 13% respectively year-over-year in Q4 2021, which supports a lot of optimism.
IBM Stock Has a Strong Dividend Yield for Tough Times
The company has a forward dividend and yield of $6.56 and 5.11% respectively as of March 24. It is remarkable that the company has raised its dividend for 27 consecutive years and is beating the Technology Sector which has an average yield of 1.37%. The fact that the latest payout ratio of 124.7% is too high and that IBM’s dividend payments are not properly covered by earnings raises concerns. It is reassuring though to note that the free cash flow trend is strong and positive, and that gives a lot of flexibility to IBM to continue supporting higher dividends in the future.
Valuation: Attractive and Hard to Ignore
IBM has a forward Price/Earnings (P/E) generally accepted accounting principles (GAAP) of 19.90, a Price / Sales (FWD) of 1.90, and a Price / Cash Flow (FWD) of 8.82. The median values for the Information Technology Sector are 25.33, 3.29, and 19.37 respectively. This shows a significant discount for IBM stock.
On the negative side, in the past four consecutive years, the revenue growth has been not impressive. Especially for 2020 when IBM reported a plunge of nearly 29% in sales.
2021 showed a rebound with an approximately 4% revenue growth. IBM has acquired 15 companies in 2021 to improve its hybrid cloud and AI capabilities. It is not a perfect stock as its debt-to-equity (D/E) ratio of 2.92 is high.
Altogether, IBM is a blue-chip stock that could give a strong financial performance in 2022. Its Q4 2021 results were strong and it has an attractive dividend for passive income. Not a bad combination at all. This makes this high-quality stock hard to ignore.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
