Limited Growth but Stable Cash Flow for Income

IBM - International Business Machine

IBM is an integrated technology company providing data, information technology, and deep expertise in industries and business processes. IBM is a huge global company which can be gauged from the fact that 47 of the Fortune 50 companies depend on the IBM Cloud, today. IBM has a global presence, operating in more than 175 countries.

The company’s major operations consist of five business segments:

  • Cognitive Solutions (23% of 2018 revenues),
  • Global Business Services (21%),
  • Technology Services & Cloud Platforms (43%),
  • Systems (10%) and
  • Global Financing (2%).

IBM was one of the first players to launch AI for business into the mainstream with the introduction of its Watson platform in 2014. The platform is very versatile and is the most trusted AI for businesses.

IBM has quickly become a critical partner for various industries. It provides the necessary software that primarily runs mission-critical systems in industries such as banking, airlines, and retail. The company provides integrated solutions and platforms to its clients.

Investment Data

Revenue Growth & Market Exposure

As a leader in high-value segments of the IT market, the company provides a full suite of solutions ranging from analytics, and artificial intelligence to cloud, security, and blockchain solutions. Clients prefer IBM for its industry-leading portfolio of consulting and IT implementation services, cloud, digital and cognitive offerings, and enterprise systems and software. The company has developed a strong level of customer trust over the years, given its industry expertise, data driven insights and data security. IBM safeguards client data with industry leading technologies

Today, companies are looking at business transformations and ways to engage better with their customers and employees. IBM helps its clients to move from one era to the next through innovative technology. The company offers relevant solutions to its clients who are leaders in their respective industries.

IBM annually invests approximately 7% of total revenue for R&D. The company spends millions of dollars on research and development of the latest digital technologies like AI, analytics, and blockchain. It is a leader in the ownership of US patents, worldwide. Over the years, IBM has completely transformed into cloud and as-a-Service delivery models. IBM’s business model is dynamic, keeping pace with the changing times. The company continues to grow organically as well as through acquisitions. Its acquisition of Red Hat has resulted in the creation of the world’s largest hybrid cloud provider.

IBM is in a good place to leverage its leading market position and benefit from continued demand growth of data. Data, AI, cloud, analytics, and cybersecurity now represent more than half of its revenues. IBM should continue to grow its revenues on the back of new client agreements as well as renewal of existing ones. The company expects to generate low single-digit revenue growth in the long term.

Dividends

IBM is a dividend achiever. It has not only paid dividends in every single year in the past century but has also raised them for 23 consecutive years. This is a big feat for the company. It currently sports an average annual dividend yield of 4.4% and has a payout ratio of 66%. IBM last raised its dividend by 3.2% and has achieved a 10-year dividend growth rate of 12.6% CAGR. It returned more than $10 billion in dividends and share repurchases to its shareholders in the last year.

IBM has rich cash flows and is expecting free cash flow to be ~$12 billion in 2019. Free cash flow realization is expected to be nearly 100% of its GAAP net income. This flow of cash should help the company comfortably pay its dividends from time to time.

IBM is expecting the Red Hat acquisition to be accretive to free cash flow in the first year. Earnings per share will also improve by the end of the second year. The company has also divested its legacy hardware business and is embarking upon a multi-year turnaround focusing on strategic imperatives. IBM is expecting the next phase of growth to come from enterprise management solutions, i.e. by scaling and embedding AI deeply in businesses and by moving mission-critical applications to hybrid cloud.

IBM’s rock-solid brand reputation, diversified industry footprint and rich expertise positions it well to gain from improving trends of digitization across industries and act as huge enablers for the company to continue its dividend growth streak in the future.

Competition

Oracle, Infosys, TCS, Cognizant, Accenture, etc. are IBM’s chief rivals. Oracle is the #1 provider of business software, with a broad portfolio of solutions for companies of all sizes while Infosys is a global leader in next-generation digital services and consulting.

Both Cognizant and Accenture are leading providers of consulting, digital, and technology services globally. These companies continue to battle each other in the era of rapid computing, cloud services and growing demand for data. New forms of digital technology are redefining possibilities in the consumer industry. IBM’s research and development operation differentiate it from the new generation of digitally savvy competitors.

Bottom Line

The world is digitized today and businesses need to keep reinventing to take advantage of the data. IBM is in a good position to benefit from this growth trend. IBM has established the world’s deepest portfolio of enterprise AI, cloud data services, and talent management solutions. Its acquisition of Red Hat is supposed to improve both revenues and free cash flows in the near future. IBM should continue growing its dividend in the low to mid single-digit range going forward.

IBM fits in my portfolio as an income investment. Not a high payer like AT&T but still a decent income provider with a higher potential dividend growth than the telecom stocks.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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