Some next-level investment opportunities slip through Wall Street's fingers. Right now, I see very little market-maker interest in one of the greatest artificial intelligence (AI) experts out there.
This stock was changing hands for less than $164 per share on Dec. 28th. That's a multiyear high, but the technology veteran still trades far below the all-time highs set in 2013. And metrics like the average trading volume show that this AI pioneer didn't catch much of a tailwind from the ChatGPT-inspired AI frenzy of 2023.
I'm talking about International Business Machines (IBM -1.54%), of course. Big Blue has been a trendsetter in AI for decades, judiciously doubling down on this growth driver since 2012, and is set up for wealth-building AI success. But somehow, most investors never got the memo.
Let me explain why IBM is a no-brainer AI investment at $164 per share, positioned for game-changing returns as the AI market rage plays out.
Price trends
Let's start with the simple stock price.
IBM's shares have underperformed the S&P 500 index this year, delivering a 16% year-to-date return, versus the market index rising 25%. Taking a longer perspective, IBM's stock sits 20% below the all-time high of $206 in March 2013. The leading market index more than tripled from that point:
As you can see, IBM's transformation from an all-you-can-eat IT buffet to an AI, security, and cloud computing specialist has been painful. The company has been shedding most of its hardware business and spun off its IT infrastructure services to form Kyndryl in 2021. The tighter IBM business has generated steady free cash flow over the last decade, but top-line sales are down.
Market makers haven't loved that long-term trend. The IBM position I started in 2015 is up by a forgettable 6% nearly nine years later. Hold that thought, though -- I'll get back to those IBM returns in a minute.
But first, let's compare IBM's recent trading volume to that of a well-known AI darling, C3.ai (AI -2.64%):
IBM 30-Day Average Daily Volume data by YCharts.
C3.ai's sleepy trading volume soared in early 2023, as investors saw the company as a direct play on the booming AI opportunity. The enthusiasm faded somewhat later on, but it's still a significant surge, compared to the average trading volumes of 2022 and earlier.
Not so for IBM. Sure, there are a couple of volume spikes in that Big Blue chart, but investor interest is actually down significantly this year. It's more than fair to say that this stock isn't riding the AI gravy train -- yet.
Don't forget IBM's generous dividend!
Remember the disappointing long-term returns on my IBM investment? As it turns out, the pain is milder if you account for the company's generous dividend policy.
I set my IBM stock up for automatic dividend reinvestment right away. At the time, the effective dividend yield was a reasonable 2.7%. But IBM has raised its annual payouts without fail in each of the last 28 years, driving the cash payments 51% higher since I made my initial purchase. So the number of IBM shares in my account have grown by 46% over time.
Together, the richer payouts and larger holdings produced a 56% return on my original investment -- far behind the S&P 500 -- but it beats the 30% accumulated inflation over the same period. And now, the effective yield on my aging IBM investment works out to 6.3%. Only six of the 500 stocks in the S&P 500 can beat that yield on a fresh investment, and they're in traditional income-investing sectors such as telecoms and energy producers.
Buying IBM today won't give you that meaty long-term yield immediately, but the company is likely to continue sharing its cash with its shareholders through generous dividend payments. Come back in another decade, and you should have a similar dividend-boosting story to tell.
Big Blue's AI expertise
That robust dividend policy is just the cherry on top of IBM's intelligent strategy shift.
The road to this crossroads hasn't been easy, but the focus on so-called "strategic imperatives," such as AI and cloud computing, is paying off right now. The watsonx AI platform is helping IBM customers analyze data; generate and understand human language (like ChatGPT); train specialized large language models on a company's actual business data; and much more.
Clients are embracing this powerful AI system. As a result, IBM's data and AI sales rose 6% year over year in the recent third-quarter report, while the Watson-powered automation business lifted its sales 14% higher. Remember, IBM delivered these solid gains during an inflation-fighting economic crisis. That's not an easy feat.
And that's just the start of a long growth spurt. IBM is signing lots of long-term deals in AI services and hybrid cloud platforms, lifting the book-to-bill ratio to 1.15. Values above 1 on this important metric point to stronger sales in future quarters as the future value of signed contracts is converted into fully paid revenue.
That's why you should buy IBM now and hold it for the long haul
IBM offers a unique and sector-leading suite of AI services with a focus on enterprise-class corporate clients, happily leaving consumer-grade stuff to other providers. The stock has gone nowhere in a decade, resulting in generous dividend yields and a price-to-free-cash-flow ratio of 13.
I don't mean to bash C3.ai, but that fellow business-oriented AI expert isn't even profitable and trades at 12 times sales. On that level, IBM's price-to-sales ratio stops at a comfy 2.5.
If you're looking for a great AI investment at a modest stock price, IBM fits the bill. That juicy dividend adds another reason to buy Big Blue today and hold for years and years.
