IBM Turnaround, High Dividend Yield Providing Stability In Current Market Rout

After a very long time, the shares of International Business Machines (NYSE:IBM) are outperforming other technology giants. IBM has been a rare pocket of stability in this year’s market rout, falling just 3% through Friday compared with a 25% loss for the NASDAQ 100 Index for the year.

This resilience in a market where investors are shunning high-profile growth stocks, like Amazon.com (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) on fears of a recession, is surprising, given the Big Blue’s struggles of the past decade in which it failed to grow and innovate.

IBM Weekly Chart

Source: Investing.com

Investors' new-found love for the New York-based company, which has been known for its large mainframe computers and floppy disks, offers a strong signal that its turnaround efforts have begun to pay off.

Since taking over IBM’s helm last year, Chief Executive Officer Arvind Krishna has been trying to accelerate cloud-computing sales and improve the company’s market share in this highly lucrative business where MSFT and AMZN are leading. 

Krishna has reorganized the company’s business around a hybrid-cloud strategy, which allows customers to store data in private servers and on multiple public clouds. IBM completed its purchase of Red Hat for $33 billion in 2019, the first step in a shift to what it calls hybrid-cloud.

Another part of Krishna’s restructuring was to spin off the 110-year-old IBM’s legacy business into a new entity so that the management could focus on its new growth areas. That plan was completed in November, when IBM spun off a large portion of its legacy infrastructure services unit into a new company called Kyndryl Holdings Inc (NYSE:KD).

Highest Growth In A Decade

After years of stagnant or slipping sales, these steps are reviving sales after almost a decade of stagnation. Sales rose 9% to $15.5 billion in the three months ending June 30, the highest growth in almost a decade. Hybrid-cloud revenue jumped 18% to $5.9 billion in the quarter. 

Another reason that’s making IBM a good place to hide in the current market turmoil is its revenue diversification. Even as IT hardware budgets and tech valuations take a hit in an environment overwhelmed by inflation, companies are increasingly investing in areas like cybersecurity and analytics, which make up about half of IBM’s revenue. 

In addition, only 20% of the company’s revenue stems from hardware and operating system software.

IBM’s defensive nature and further upside potential make its stock an attractive buy in the current economic environment. The stock has substantial upside potential, according to InvestingPro’s models, which value companies based on P/E or P/S multiples or terminal values. The average fair value for IBM on InvestingPro stands at $170.32, implying more than 30% upside potential. 

Fair Value Model For IBM Stock

Source: InvestingPro

For long-term investors, another attraction to owning IBM is its safe dividend and more than 5% dividend yield. There is little risk to its payout if the management’s shift to cloud computing continues to bring in more sales, unlocking the true value of IBM stock, which has hiked its dividend for 27 years straight. 

The stock currently pays $1.65 a share quarterly dividend, which translates into 5.09% annual dividend yield, making it one of the highest-yielding stocks among blue-chip companies. 

Bottom Line

When it comes to growth, during the past decade, IBM has certainly disappointed its investors. But after the Red Hat acquisition and with new management in place, I see IBM slowly getting back on a path to growth. IBM’s healthy balance sheet, manageable debt and more than 5% dividend yield make its stock a bet worth considering, especially when its turnaround is gaining pace.

Disclaimer: Haris Anwar doesn't own IBM stock.