IBM (NYSE: IBM) faces a critical moment in its history. Even before the negative financial implications of the coronavirus were the subject of anxiety and instability, IBM faced a serious challenge when Arvind Krishna was preparing to assume the role of CEO. Now that the coronavirus is putting deep pressure on IBM shares and the market in general, investor rates have become much higher.
Technically IBM still stands for "International Machines for Business" and of course investors should not forget about the company's supercomputers. Researchers use these computers for many tasks. Among other things, they conduct simulations to help fight the virus. The company has announced the construction of a second quantum computer in Germany, which should be operational by early 2021. And yet, despite these loud computers, the "machine" part of the company has received less attention in recent years. Today, the "cloud" has become a more visible part of its business. The company spent $34 billion buying Red Hat last year to improve its cloud computing offering. As a result, it has a long-term debt of $54.1 billion with just under $21 billion left after deducting liabilities from its assets, it may have become an all-in bet on the cloud. This shift to the cloud took place during Ginni Rometti's tenure as CEO. However, the last decade has been one in which most IBM shareholders probably want to forget. When Rometti headed the company in January 2012, IBM shares opened at $186.73 per share. To date, the stock has fallen by about 49%. Time will show if the company, known for its punched cards in the mid-20th century and personal computers in the 70s and 80s, is going to remake itself again. This transition to the cloud took place during Jeannie Rometti's tenure as CEO. However, the last decade has been one in which most IBM shareholders probably want to forget. When Rometti headed the company in January 2012, IBM shares opened at $186.73 per share. To date, the stock has fallen by about 49%. Time will tell if the company, known for its punched cards in the mid-20th century and personal computers in the 70s and 80s, is going to remake itself again. However, many cannot help but notice a parallel between Arvind Krishna and
Microsoft CEO Satya Nadella. Nadella, like Krishna, headed his company's Cloud Computing division before becoming CEO. Nadella has turned his PC company into one of the leading cloud companies. The redesign of Microsoft has brought the company back to the world's largest market capitalization. While it is now struggling with Apple every day for the title, Nadella has once again succeeded in making Microsoft one of the leading high-tech companies. Moreover, given the current sale, a successful turnaround by IBM can bring significant benefits to investors. For the first time since 2009, IBM shares are trading below $100 per share. The forward price to profit (P/E) ratio of IBM was about 7.1. Even with projected profit growth of only 3.9% this year and 6.1% in fiscal 2021, this estimate seems low. It also compares well with an average P/E S&P 500 of about 17.3. Moreover, even if the stock price recovery takes a short time, IBM will pay investors well while they wait. Partly due to the decline in the share price, the dividend yield rose to an unusually high level of about 6.8%. This is about 2.7 times higher than the average S&P 500 share price. Also, payments have also been increasing for 20 consecutive years, bringing IBM to Dividend Aristocrat status within five years.
IBM's profits have fallen by an average of 5% per year over the last five years. However, the payout ratio, or percentage of the profit that goes into dividends, is about 48.7%. Although this figure is not low, it shows that IBM problems have not yet jeopardized the company's ability to cover the dividends. This does not necessarily mean that IBM will soon have a trillion-market capitalization. It does not even guarantee that Krishna will successfully replicate Microsoft's cloud success at IBM. Of course, the company's finances do not leave the company with a significant margin of error in this regard.
IBM may go down a path that will bring the company back to growth. With a low share price and high dividend yield, the company can pay investors to take the chance and buy IBM shares at a cheap price.