International Business Machines (IBM) has always been a great stock to buy for dividend investors. The company’s 4.72% yield is more than twice the average yield in the S&P 500 index. And its yield has outperformed the index for some time. However, that hasn’t been the case for IBM stock, which has lagged the S&P 500 over the past three years and five years.
However, as the company continues to transition away from its legacy businesses into a high-growth cloud specialist, IBM’s prospects are now much brighter. And the market has begun to reward the company for its turnaround. Can that momentum continue? That answer will become more clear after the company provides its second quarter fiscal 2022 earnings results Monday after the closing bell. IBM's cloud prowess has been strong in recent quarters, emerging more modernized and providing the sort of revenue strength needed to support a higher multiple.
In particular, IBM's hybrid cloud now provides IBM the foundation to run any application. Currently boasting 3,800 customers on their hybrid cloud platform at the end of FY 2021, IBM in the first quarter added 200 more new customers which brought the total to above 4,000. As it stands, the hybrid cloud business now accounts for more than 70% of total software revenue in the most recent quarter. The market is now giving IBM more credit for its cloud transition.
In the first quarter, IBM reported better-than-expected results and issued guidance that topped Wall Street estimates, which sent IBM stock surging more than 7%. The results underscored the level of execution the company has adopted amid its massive multiyear restructuring. The shares are now up about 5% year to date, compared with a 19% decline in the S&P 500 index. But for IBM stock to maintain its outperformance, the company on Monday will need to demonstrate continued operating leverage and revenue growth acceleration.
For the three-month period that ended June, Wall Street expects the New York-based company to earn $2.28 per share on revenue of $15.25 billion. This compares to the year-ago quarter when earnings were $2.33 per share on $18.75 billion in revenue. For the full year, ending in December, earnings are projected to rise 22% year over year to $9.69 per share, while revenue of $60.89 billion would rise 6.2% year over year.
The tech giant has struggled to grow revenues over the past decade and has not benefited in the massive economic expansion that saw cloud leaders such as Amazon (AMZN) and Microsoft (MSFT) produce double-digit revenue gains. The company’s Red Hat acquisition, however, allowed IBM to take a major leap forward to compete with established rivals. What’s more, the company's spinoff of Kyndryl allowed IBM to better leverage its technology and consulting services portfolio and develop growth initiatives for its hybrid cloud and AI.
What’s more, having beaten the Street's earnings expectations in nine of its last 10 quarters, execution is no longer an issue. In the first quarter, IBM beat on both the top and bottom lines, reporting revenue of $14.20 billion which beat estimates by $352 million, while adjusted EPS of $1.40 was 2 cents better than consensus. Demand for the hybrid cloud was a key drive of the strong results, thanks to 12% rise in software revenue to $5.8 billion. A 7% rise in revenue from hybrid platform products and 18% jump in revenue from Red Hat were also key drivers.
The management noted that IBM now has a “more focused business,” as a result of the Kyndryl spinoff, which simplified the business. In other words, the company has graduated from a turnaround story to a growth story. On Monday investors will want to see whether IBM can build on this success.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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