There hasn’t been much to write home about when it comes to IBM stock. It’s been all negative, with a lackluster second quarter, thirteen quarters in a row with a negative performance, dubbed one of the most universally despised companies in the world, blah, blah and more blah. It’s depressing. So, why rethink IBM stock? Because IBM has over$12 billion cash from last year, its dividend yield is a decent 3.2%, and because it has increased its dividend by 18% per year over the past five years. Bob Ciura makes a case for IBM below
It’s no secret that IBM (NYSE:IBM) is struggling. IBM is one of the most universally despised companies in the world. The stock has been on a nearly unimpeded decline for a disturbingly long time. Shares of IBM are down 17% in the past year. In fact, IBM was the worst performing stock in the Dow Jones Industrial Average in both 2013 and 2014. There don’t seem to be enough negative things to say about IBM.
The criticism of IBM got even more heated after the company’s second quarter earnings, when IBM posted its 13th quarter in a row of declining revenue. One bright spot was the company’s progress in what it calls its ‘strategic imperatives’, which are higher-growth businesses like big data, the cloud, and security. Unfortunately, strong growth in these areas wasn’t even enough to satisfy analysts, who were quick to point out that these businesses are still too small to have any material impact.
But it’s worth digging deeper into IBM’s turnaround to find out whether this is actually true.
Strategic Imperatives Are Not Getting Enough Credit
It seems nobody is giving much credit to IBM for its strategic imperatives, but this is a mistake. These businesses are growing at impressive rates. Cloud revenue soared more than 70% adjusted for currency and cloud delivered as a service has reached an $8.7 billion annualized rate. Social revenue jumped more than 40% year to date excluding currency, and mobile revenue has more than quadrupled. Collectively, the strategic imperatives grew revenue by more than 30% over the first two quarters of the year adjusting for currency and divestments.
The bearish argument is that $8 billion represents a drop in the bucket for a company the size of IBM, and therefore the strategic imperatives are too inconsequential to stem the decline in IBM’s other businesses. But again, it’s worth noting that excluding foreign exchange and divestments, the overall decline is very modest. And, should those businesses keep growing anywhere close to 30% per year, it won’t take long at all for those businesses to become a very important part of the overall company.
This is already starting to happen. IBM stated in its 2014 annual report that in 2009, its strategic imperatives represented just 13% of its total revenue. Last year, these businesses accounted for 27%, more than doubling in that time. This year, the percentage will be even higher, and that should only continue going forward.