Every Thursday we bring you one of our recommended U.S. stocks. These picks come from our newsletter on U.S. investing, Wall Street Stock Forecaster,or from our advisory for more aggressive investing, Stock Pickers Digest. Today we look at one of the top dividend stocks among our U.S. recommendations.
IBM’s shares fell from $190 in October 2014 to $150 in December. That’s because many businesses are shifting to cheaper cloud computing platforms and spending less on IBM’s mainframes and consulting services.
But the company has a long history of shifting from unprofitable businesses to fast-growing ones. And we feel its new plan to focus on cloud computing and analytics software will spur its earnings for years to come. To top it off, IBM’s strong balance sheet gives it lots of room to keep buying back shares and raising its dividend.
INTERNATIONAL BUSINESS MACHINES CORP. (New York symbol IBM: www.ibm.com) traces its history back to 1911. Today, it’s one of the world’s largest computer companies, with operations in over 175 countries.
In the past few years, IBM has moved away from making computers to designing entire systems and managing them for businesses and government agencies. It provides these services under long-term contracts, which gives it predictable revenue streams. In 2014, computer services supplied 59% of the company’s revenue.
Meanwhile, IBM continues to build up its software business, which supplied 28% of its 2014 revenue. Last year, the company sold its low-end server business to China’s Lenovo Group for $2.1 billion in cash and Lenovo shares.
It’s also selling its chip-making operations to Globalfoundries Inc. It won’t get any payment; instead, it will pay Globalfoundries $1.5 billion to take over this money- losing business. IBM has also agreed to buy chips from Globalfoundries for the next 10 years. The company expects to close the deal by the end of 2015.
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$1 billion earmarked for programs from supercomputer that beat humans on “Jeopardy”
These sales have cut the contribution from IBM’s computer hardware division (mainframes and high-end servers) to just 11% of its revenue. Its financing division supplied the remaining 2%.
IBM’s revenue declined 5.7% in 2014. Earnings for 2014 were $15.8 billion, or $15.59 a share. In the three months ended March 31, 2015, IBM earned $2.9 billion before unusual items, up 3.6% from $2.8 billion a year earlier. The company spent $1.2 billion on share buybacks in the latest quarter.
A big part of IBM’s growth will come from analytics software, which can process huge amounts of data. That helps the company’s business clients boost their efficiency. In the past five years, IBM has spent $17 billion buying over 30 smaller analytics firms.
Perhaps the best-known part of IBM’s analytics business is its Watson supercomputer, which beat human contestants on the quiz show Jeopardy. The company now plans to invest $1 billion to create analytics programs that can take advantage of Watson’s computing power.
IBM also recently set up a business to develop software that analyzes data from smartphones, tablets, vehicles and appliances. The trend toward adding products beyond computers and mobile devices to the Web is called the “Internet of Things,” and it could total over 30 billion connections by 2020.
IBM expects analytic and cloud business to rise to $40 billion by 2018
Meanwhile, IBM continues to build up its cloud computing operations. Unlike competing platforms, IBM Cloud offers a combination of secure local data storage and the convenience of cloud-based programs. In 2014, IBM Cloud formed alliances with German business software maker SAP and Chinese e-commerce firm Tencent.
In all, IBM plans to spend $4 billion on analytics and the cloud in 2015. It expects revenue from these businesses to rise to $40 billion by 2018 and account for 40% of its total, up from 27% in 2014.
IBM won 7,534 U.S. patents in 2014, up 10.6% from 6,809 in 2013. This was also the 22nd consecutive year IBM received more patents than any other firm and the most ever awarded to one company in a single year. Licensing intellectual property generated $742 million in pre-tax income for IBM in 2014.
IBM’s strong balance sheet will support its transformation. Its $34.3 billion of long-term debt (as of March 31, 2015) is a moderate 21% of its market cap. It also holds cash of $8.8 billion, or $8.94 a share.
The company recently updated its mainframes, which should boost its revenue and offset the negative impact of the high U.S. dollar; overseas markets supply 55% of IBM’s revenue.
IBM expects to earn $15.75 to $16.50 a share this year, and it trades at just 10.2 times the midpoint of that range. The $4.40 dividend yields 2.7%.
Recommendation in Wall Street Stock Forecaster: BUY.
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