International Business Machines Stock: A Solid Value Play

International Business Machines Corporation (NYSE: IBM) supplies businesses with integrated solutions and services internationally.

The company’s Cloud & Cognitive Software segment provides software for vertical and domain-specific solutions in several application areas, while IBM’s other divisions include customer information control system and storage, and analytics and integration software solutions to enhance client mission on-premise workloads in banking, airline, and multiple other industries.

Red Hat, one of the company’s most recent and largest acquisitions, has been a fundamental driver for the company that has somewhat revitalized its growth. Red Hat grew by 18% last year, featuring a backlog topping $5 billion for the first time at the last year’s end.

Red Hat, along with IBM’s modernized Cloud Pak solutions, should keep delivering solid software revenue growth in the double-digits for the company. Combined with IBM’s infamous dividend, which currently yields close to 5%, the stock could produce satisfactory shareholder returns going forward.

In my view, IBM is a value play at its current levels. That said, due to the tech sector likely featuring better opportunities out there, especially following the recent correction, I am neutral on the stock.

Latest Results And Dividend

IBM Q3 2021 results came in rather stable, with company-wide revenues growing 0.3% to $17.6 billion year-over-year. Diluted adjusted EPS declined by 2% to $2.52 during this period as well.

Specifically, revenues from the company’s Cloud & Cognitive Software segment grew 2.5% to $5.7 billion, driven by a 10% growth in Cloud & Data, stable numbers in Cognitive, and a 9% drop in Transaction Processing.

Global Business revenues grew 11.6% to $4.4 billion, driven by a 17% growth in Consulting, a 19% increase in Global Process Services, and a 5% growth in Application Management.

Year-to-date, IBM paid down about $7 billion in total debt, continuing its deleveraging process. The company ended Q3 with $8.4 billion of cash on hand, down $5.9 billion from year-end 2020, reflecting acquisitions of $3.0 billion and its debt reduction payments.

The $3 billion in acquisitions was spent on Rego Consulting, 7Summits, Bluetab, BoxBoat, Waeg, Turbonomic, and other companies IBM acquired to enhance its overall offerings.

The company also completed the spinoff of Kyndryl (NYSE: KD) last month, through which shareholders received 80.1% of the new company, and IBM retained the remaining 19.9%. The total dividend between the two companies is to be no less than the current dividend, which should comfort IBM’s income-oriented investors.

Speaking of the dividend, IBM has increased it annually every year for the past 26, which places the company amongst the distinct group of companies known as Dividend Aristocrats.

The latest DPS hike was by a tiny 0.6%, though the dividend overall remains substantial and is well-covered. Assuming the company reports EPS just over $10 for the year, IBM’s payout ratio should stand just over 65%.

Valuation

IBM is currently trading at a P/E of around 13.3, assuming EPS just over $10 for the year. This is in line with the company’s historical average.

From a yield perspective, IBM’s ~5% is at the high-end of its historical range as the company has constantly been growing the dividend, but shares have failed to appreciate proportionally.

Wall Street’s Take

Turning to Wall Street, International Business Machines Corporation has a Moderate Buy consensus rating, based on six Buys and three Holds assigned in the past three months. At $158.48, IBM’s stock forecast suggests 18.9% upside potential.

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Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.