International Business Machines: 3 Reasons to Be Bullish on IBM Stock

International Business MachinesMore Upside for IBM Stock?

Billionaire Warren Buffett remains bullish on International Business Machines Corp. (NYSE:IBM) stock, even if the company has been struggling to increase its revenue over the past few years.

During an interview with CNBC’s Squawk Box in May, Buffet said, “We feel fine, or we won’t own it. We’ve never sold a share of IBM. Periodically, we buy a little bit more.” (Source: “Buffett: We’ve ‘never sold a share of IBM’ and might buy more,” CNBC, May 2, 2016.)

Buffett also indicated that Berkshire Hathaway Inc. (NYSE:BRK.A, NYSE:BRK.B) would be “much more likely to buy more in the next 12 or 24 months” than sell shares of International Business Machines. (Source: Ibid.) His conglomerate owned more than 81.23 million shares, or an 8.54% stake, in IBM stock as of March 31, 2016, based on Berkshire’s 13F filings. (Source: “Berkshire Hathaway Holdings,” Insider Monkey, last accessed August 4, 2016.)

Why is Buffett so confident that IBM stock remains a good investment and should you follow him?

IBM Stock Could Go Soar on Strategic Imperatives

International Business Machines is making huge investments in businesses such as analytics, cloud computing, mobile, and security technologies. The company’s management considers these businesses “strategic imperatives” to help drive growth and profitability.

The company reported that its second-quarter revenues from its strategic imperatives increased 12% year-over-year. Its revenue from cloud computing climbed 30% to $11.6 billion. Its revenue from analytics increased five percent, while mobile revenue grew 43%, and security rose 18%. Even if the company reported that its total revenue declined three percent to $20.2 billion during the period, the performance of its strategic imperatives is impressive. (Source: “IBM Reports 2016 Second-Quarter Earnings,” International Business Machines Corp., July 18, 2016.)

IBM is still a leader in the IT industry. The company has been named a leader in “Magic Quadrant for Data Center Outsourcing and Infrastructure Utility Services,” “Private Cloud Adoption,” and “Hybrid Cloud Environment Adoption,” according to Technology Business Research, Inc. (Source: “IBM Captures Leadership Position in Hybrid Cloud Environment Adoption, According to Research Firm,” International Business Machines Corp., August 1, 2016.)

The company is focused on positioning itself as the leading cognitive solutions and cloud computing company by driving innovations in analytics, cloud video services, cybersecurity, and other areas. The company recently achieved breakthroughs in quantum computing, the “Internet of Things,” and blockchain solutions for “IBM Cloud.” These initiatives could help boost the company’s profit and revenue, which could lead to significant upside for IBM stock.

IBM Stock Suitable for Value Investors

If you are looking to invest in a great company with a strong balance sheet that is currently undervalued, IBM stock is one to consider. The stock is currently trading at around $160.00 per share, which many consider attractive and cheap.

Given its low-level valuation, IBM stock offers investors a substantial opportunity to generate huge returns. Take note that the company’s management is investing heavily in businesses that could deliver superior growth and profitability.

IBM stock has lost more than 11% in value over the past five years. The stock traded as high as $214.92 per share on March 15, 2015 and has declined to as low as $121.04 per share on February 12, 2016.

International Business Machines recovered from its low point. IBM stock gained more than 16% year-to-date or over 28% over the past six months. Its recent stock performance showed that it is geared toward higher ground.

International Business Machines Dividend Payout

Another important factor you should consider is the fact that International Business Machines has an impressive record of paying investors a dividend. The company has been consistently distributing dividends to its stockholders since 1916.

In April, International Business Machines increased its quarterly dividend payout by 7.7% to $1.40 per share. The company’s annualized dividend is $5.60 per share. IBM has been raising its quarterly dividend payout over the past five years and is expected to continue doing that.

Take note that International Business Machines has a track record of returning capital to shareholders instead of keeping a stockpile of cash. In the first half of 2016 alone, the company returned $4.0 billion to shareholders through dividends and stock buybacks. In other words, the company’s management appears to have the best interest of its shareholders in mind.

The Bottom Line for IBM Stock

Once the company starts reporting revenue growth—which I believe could happen soon due to the outstanding performance of its strategic imperatives—IBM stock could trade higher, offering big long-term gains for investors.

IBM stock remains a great investment because the company continues to maintain its profitability despite making huge capital expenditures in its transformation efforts.