Buy IBM Stock Before Q2 Earnings for Dividend Growth & Cloud Push?
IBM IBM stock has lagged the broader tech space since the market’s March 23 lows, up 30% against its industry’s 50% climb. That said, IBM has raised its dividend during the coronavirus pandemic and it has deepened its push into cloud computing, which includes its appointment of new CEO Arvind Krishna, its Red Hat acquisition, more.
IBM’s new chief executive officially took over in April after the company announced in January that Ginni Rometty would step down. Krishna had already played a large role in shifting IBM’s focus to cloud, AI, and quantum computing.
Now the company hopes to expand its reach in the next-generation of technologies. This includes its July 2019 purchase of open-source software firm Red Hat for $34 billion, which is expected to help boost its hybrid cloud future.
IBM has fallen behind industry leaders such as Microsoft MSFT, Amazon AMZN, and others. And despite expanding into cloud and AI, IBM’s sales have fallen in six out of the last seven quarters, as part of a broader 10-year decline.
IBM’s stock price has reflected this downturn, with IBM shares down 30% in the last five years, against the tech market’s 90% climb—it’s also moved sideways over the last decade
That said, IBM’s new CEO told the Wall Street Journal in early May that he “believes the marketplace adoption of hybrid cloud technology is only about 20% complete, and that the adoption of AI is about 4% complete.” And the coronavirus might have helped speed up the broader transition.
Our current Zacks estimates call for IBM’s adjusted Q2 earnings to fall 32% to $2.14 per share, on 7.6% lower revenue. The company’s adjusted fiscal 2020 earnings are then expected to sink 12%, with sales projected to dip 5.5%. IBM has also seen its earnings revisions trend lower to help it hold a Zacks Rank #4 (Sell) right now.
IBM has, however, continued to raise its dividend, upping its payout for the 25th straight year during the Covid-19 pandemic. The firm’s $1.63 a share dividend currently yields 5.3% to blow away the S&P 500’s 1.8% average, as well as Qualcomm’s QCOM 2.8% yield and Cisco’s CSCO 3.1%. “IBM's free cash flow and our strong balance sheet gives us confidence to both invest aggressively in cloud and AI technologies, while also returning value to our shareholders,” IBM’s CEO said in prepared remarks in late April.
Cleary, some income investors will find its 5% yield attractive, even though it’s somewhat artificially inflated by its falling stock price. IBM has also announced layoffs under its new CEO.
Yet it might be best to hold off on IBM until its push into cloud and AI starts to pay off, which Wall Street will hear more about when it reports its Q2 financial results on Monday, July 20.
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