Growth, high yield, and cheap -- what's not to like?
Barbara Eisner Bayer (IBM): Ever heard of IBM? Sure you have! It's been a household name in three centuries. Founded in 1896 as the Tabulating Machine Company, it claimed the name International Business Machines in 1924. It was one of the greatest companies in the U.S. throughout much of its history, but when it missed opportunities to keep innovating by sticking to its mainframe computing business, it fell deeply off its perch.
After almost 10 years of watching its revenue decline, IBM finally took the bull by the horns and started reinventing itself into a cloud-computing and AI-focused company. It acquired Red Hat in 2019, a company where 94% of its customers were in the Fortune 500. It also has an increased focus on its consulting arm and can boast of serving the top banks, automotive companies, telecoms, national governments, insurance, and healthcare companies around.
The "new" IBM began with the appointment of Arvind Krishna as CEO, who had previously been head of the cloud division. He engineered the spin-off of IBM's managed-IT infrastructure services division Kyndryl in November 2021, which was bringing the company down. That move is now enabling him to lead the company in the cloud computing market.
How much difference has this made? Since the spin-off, Kyndryl's shares have fallen 60%. It's a good thing for IBM investors that the company no longer has that elephant on its back.
IBM's latest fourth-quarter earnings report showed the impact of the release of Kyndryl. Revenue was up 6.5% year over year in the quarter. Hybrid-cloud revenue was up 16% year over year, and the company boasted adding an additional 1,000 clients to its hybrid-cloud offerings. In addition, revenue from its consulting division was up 13.1% in the fourth quarter, and the company anticipates continued growth in this segment.
It's great that IBM is now on a growth trajectory, but it's the company's dividend that makes it a great high-yield dividend stock to own. It's currently yielding 5.2% and is the only tech stock that ranks in the top 10 most generous dividend payers in the S&P 500. And on April 28, 2020, IBM became a member of the coveted Dividend Aristocrats group, which means it has raised its dividend for at least 25 years in a row.
As for being beaten down, IBM is a poster child. With a valuation ratio of 12 times forward earnings, this growth stock is downright cheap. It's now trading at $128 a share, from an all-time high of $198.33, which was hit all the way back in 2013. Although we don't pay much attention to analyst estimates, it never hurts to take a peek. The average analyst price target for the stock is $147.23, which implies a 14.61% upside from today's price, although one analyst sees its price reaching $185.
IBM is an established, well-known company that's putting its troubles behind and entering a new wave of growth with a visionary leader. If you're looking for a company with an irresistibly cheap stock price, strong growth prospects, and an impressive high-yield dividend, IBM may be it.
