International Business Machines Corp. (NYSE:IBM) doesn’t get much respect in tech circles these days. Over the past six months, shares of IBM stock have lost a stomach-churning 25%. The company’s financial results have been underwhelming to say the least.
Or at least that’s the story everyone is told…
The bears continue to focus on one or two headline numbers. However, for those willing to dig deeper into the financial statements, there’s a really impressive story here. I suspect those bearish on IBM stock today will be kicking themselves later for three reasons. Here’s why.
1. IBM Stock Reporting Solid Results
IBM stock tanked when it reported its fourth-quarter and full-year 2015 results. Investors did not like IBM’s forecast of adjusted earnings of at least $13.50 per share in 2016, which would be below the consensus analyst estimate of $15.00 per share. (Source: “IBM Reports 2015 Fourth-Quarter and Full-Year Results,” International Business Machines Corp., January 19, 2016.)
However, if you look at what IBM has done during the reporting period, you’ll see that things might not be that bad.
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Both the top and bottom lines beat expectations. In the fourth quarter of 2015, IBM generated $22.1 billion in total revenue, beating analysts’ expectations of $22.0 billion. Adjusted net income came in at $4.7 billion, translating to earnings of $4.84 per share, also beating analysts’ estimates of $4.81 per share.
Going forward, the company’s so-called strategic imperatives could provide growth potential. In particular, cloud services did especially well in 2015: IBM generated $10.2 billion in total cloud revenue, a 57% increase adjusting for currency and the “System X” divestiture. Strong growth in mobile computing, data analytics, and security software could also continue into the future.
2. International Business Machines Corp. Boasts Dependability
Looking at the technology sector in the U.S. stock market today, you’ll see a lot of companies that carry huge valuations without actually making much money—if any at all. At the end of the day, investors expect a company to turn profitable at some point, and a bloated price-to-earnings multiple might not always be sustainable. When all the dust settles, the companies that are standing will be those that can actually make money.
Despite all the bearish sentiment lately, IBM is still a profitable company. In 2015, IBM generated $14.7 billion in adjusted net income from continuing operations. Its operating (non-GAAP) profit margin also expanded 20 basis points to 50.8%.
You see, although IBM is a tech company, it hasn’t been carrying in high beta. In fact, its beta is quite low at 0.63. (Source: “International Business Machines Corporation Dividend Date & History,” NASDAQ web site, last accessed January 22, 2016.)
This is the kind of dependability I love in a stock, especially when markets are going haywire.
3. IBM Stock Offers a Big Yield
Most of this stock’s profits have been returned to its investors in the form of lucrative dividends. Since the year 2000, IBM’s quarterly dividend has increased tenfold, from $0.13 per share to $1.30 per share. In 2015, the company paid out $4.9 billion to shareholders in distributions, raising the company’s yield to a tidy 4.2%.
However, it’s the company’s share buyback program that has really impressed me. Over the past decade, IBM has spent billions of dollars repurchasing stock, cutting its total number of shares outstanding by nearly half. If you had bought and held the stock over this period, you would’ve doubled your stake in a wonderful business, tax-free.
The bottom line: there’re plenty of reasons to be bullish on IBM stock. Combining strong dividend growth, a low valuation, a low beta, and a decent bottom line, the company could provide cushioning for a portfolio when the market goes south.