International Business Machines Corp. (NYSE:IBM) stock is seeing better days recently, as the stock rebounded off a two-year low in mid-February, up about 30%. But prior to its recent bull run, IBM stock was on a two-year downward path, dropping as much 39%. At least one investment firm saw value in IBM last quarter, though, as the stock neared rock bottom.
Stratos Wealth Partners Ltd. picked up an additional 5,113 shares in IBM during the fourth quarter, according to a recent disclosure in a U.S. Securities and Exchange Commission filing. That brings Stratos’ total number of shares in IBM to 32,798, which is valued at $4.8 million. (Source: “Stratos Wealth Partners Ltd. buys $4.8 Million stake in International Business Machines Corp.,” Los Angeles Mirror, March 31, 2016.)
So what does the investment management firm see in IBM? Let’s take a look.
The drop in IBM’s stock over the past couple of years has presented investors with an opportunity to pick up shares just for its dividend alone. IBM pays out a dividend of $5.20 per share for a very attractive yield of 3.51%.
IBM has been paying out a dividend since 1986, and in recent years, it has been increasing its dividend at a significant rate. In the last 10 years, IBM has increased its dividend from $0.30 per share to $1.30 per share, which works out to a compound annual growth rate of 15.79%. IBM stock’s payout ratio is only about 37%, so an income investor doesn’t have to worry about not receiving their dividend anytime soon.
IBM has been trying to offset 15 straight quarters of sales declines by investing in its five “strategic imperatives”—cloud, analytics, mobile, social, and security services. But it’s the first of those that is showing the most promise.
In IBM’s latest earnings report, strategic imperatives revenue increased 17% altogether, while cloud revenue alone increased 53% to $10.2 billion. (Source: “IBM Reports 2015 Fourth-Quarter and Full-Year Results,” International Business Machines Corp., January 19, 2016.) Cloud revenue now accounts for almost 35% of total strategic revenue, which is about a third of the company’s total sales.
Unfortunately, the growth in strategic services hasn’t been enough yet to offset quarterly revenue declines. But to keep fueling growth in the segment, IBM has been aggressively buying up cloud companies to beef it up. Since the start of 2016 in particular, IBM has been on a buying spree.
On Thursday, IBM announced that it has reached a deal to acquire Bluewolf Group, a consulting company that helps businesses use salesforce.com, inc. (NYSE:CRM) and other cloud software applications.
Earlier in the year, IBM announced plans to buy cloud-based video streaming company Ustream, healthcare data provider Truven Health Analytics, and Internet security company Esilient Systems.
IBM is betting big on the cloud, and investors should continue to see accelerated growth in this area.
Internet of Things
IBM wants to be the leader in the data analytics segment of the “Internet of Things” (IoT), which has the potential to be a massive revenue stream down the road. According to research firm McKinsey & Company, the IoT market will reach between $3.9 trillion and $11.1 trillion in sales by 2025. (Source: “Unlocking the potential of the Internet of Things,” McKinsey & Company, June 2015.)
Last year, IBM announced that it was planning to invest $3.0 billion over the next few years in its new IoT division in an attempt to grab a large piece of the market. (Source: “IBM’s latest big bet: $3 billion on the Internet of things,” Fortune, March 31, 2016.)
In October, IBM also announced plans to acquire The Weather Channel’s business-to-business, mobile, and cloud-based properties. IBM plans to use the massive amounts of data it will be collecting to service clients in the media, energy, aviation, and insurance industries.
IBM also bought two healthcare companies, Phytel and Explorys. Both companies will allow IBM to collect data that is healthcare-focused but can be used in other industries.
Also, IBM has partnered as a data collector with Medtronic PLC (NYSE:MDT), Johnson & Johnson (NYSE:JNJ), and several other companies. IBM will be able to use the data it collects from the company’s medical devices and use that information to boost other areas, such as helping businesses and hospitals treat diseases.
Revenue for IBM’s analytics in its strategic imperatives business segment grew only seven percent to $17.9 billion. That growth rate doesn’t sound impressive, but it should climb as IBM’s investments come to fruition.
The Bottom Line on IBM Stock
There you have it. There’s still a lot to like about IBM stock. With its attractive dividend and growth potential in cloud services and in the Internet of Things, investors may want to take a look at IBM stock.