This firm’s investors continue to benefit from its strong commitment to keep its dividend rising. They should also gain from its shift to cloud computing and the spin-off of a legacy business.
While the company has yet to announce the details, it’s likely this new firm will also pay a dividend.
INTERNATIONAL BUSINESS MACHINES CORP. (New York symbol IBM; www.ibm.com) is one of the world’s largest computer companies, with operations in over 175 countries.
With the June 2021 payment, IBM raised your quarterly dividend by 0.6%, to $1.64 a share from $1.63. The new annual rate of $6.56 for investors yields a high 4.8%. The company has paid dividends continuously since 1916 and has raised the annual rate each year for the past 26 years.
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IBM is now shifting its focus to cloud computing. As part of this strategy, it paid $34 billion for Red Hat in July 2019. It’s a leading developer of software for cloud systems.
Shifting to cloud computing has helped offset slowing demand for IBM’s traditional products and services. Its revenue fell 1.0%, from $79.92 billion in 2016 to $79.14 billion in 2017. Revenue then rose 0.6% to $79.59 billion in 2018, but fell 3.1% to $77.15 billion in 2019 and another 4.6% to $76.32 billion in 2020.
Thanks to an effective cost-control plan, earnings rose 7.8%, from $11.88 billion in 2016 to $12.81 billion in 2017. Per-share earnings gained 10.3%, from $12.39 to $13.66, on fewer shares outstanding. Earnings improved to $13.81 a share (or a total of $12.66 billion) in 2018 but fell to $12.81 ($11.44 billion) in 2019 and $8.67 ($7.77 billion) in 2020.
In the three months ended March 31, 2021, IBM’s revenue rose 0.9% to $17.73 billion from $17.57 billion a year earlier. During the first quarter, the company’s total cloud revenue increased by 21.3% to $6.5 billion. Excluding currency conversions and divested businesses, cloud revenue increased by 17.7%. Red Hat’s revenue rose 15% during the quarter, continuing its strong performance since its acquisition.
However, earnings (before one-time items) fell 3.8%, to $1.77 a share (or $1.60 billion) from $1.84 a share (or $1.65 billion). That’s partly due to the hiring of new workers and spending on growth initiatives like artificial intelligence.
IBM now plans to spin off its Managed Infrastructure Services unit as a separate company called Kyndryl. This business helps corporate and government clients manage their datacentres. Kyndryl will be twice as big as its nearest competitor—with 4,600 clients in 115 countries.
By spinning off this segment, IBM can better focus on its cloud and artificial intelligence business. The company has yet to announce many details, except that it will be a tax-free transaction for shareholders. It should complete the spinoff by the end of 2021.
Meantime, the company is still paying down the loans it needed to buy Red Hat. As of March 31, 2021, its long-term debt was $51.2 billion, down $3.15 billion since the start of the year. That’s a manageable 41% of IBM’s market cap. The company also held cash of $11.13 billion.
IBM paid a ridiculous amount for Red Hat and is now spnning off much of the old IBM business as Kyndryl while keeping Red Hat. The fallout from years of Gina Rometty’s mismanagement continue to hurt IBM.
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IBM paid a ridiculous amount for Red Hat and is now spnning off much of the old IBM business as Kyndryl while keeping Red Hat. The fallout from years of Gina Rometty’s mismanagement continue to hurt IBM.
IBM stock price has done nothing in a long time.