IBM Finds Fans in a Market Where Boring Is Rewarded
International Business Machines Corp.'s low valuation, high dividend yield, and cash flow have helped the stock outperform the broader technology sector in an environment marked by high inflation, which has led to rising interest rates and concern a recession is looming. Those attributes could be on display Wednesday as IBM, which offers infrastructure, cloud, and IT services, reports third-quarter results.
Shares of IBM rose 1.6% on Tuesday.
The stock has a price-earnings multiple of 12.6, compared with 19 for an index of tech stocks in the S&P 500. Apple Inc. and Microsoft Corp. trade for about 22 times earnings. IBM also has an indicated dividend yield of 5.4%. Among components of the S&P 500 tech index, that's second only to Intel Corp., the chipmaker mired in a difficult environment for semiconductor stocks.
“I'm of the mind that I'm going to own tech stocks if their valuations are reasonable and I can touch the cash flow, which takes me to lower PE tech like IBM,” said Bob Doll, chief investment officer at Crossmark Global Investments. “I'd rather own these companies than those that got bloated and had a crazy valuation.”
IBM has dropped 4.2% this year including reinvested dividends, versus a 28% drop for the S&P 500 tech index. According to data compiled by Bloomberg, value, profitability, and dividends have been among the best performing factors for tech stocks this year, with volatility and growth the weakest.
The backdrop represents a switch from the years where rapid growth was the favored metric for tech investors, an environment that led to massive gains for buzzy unprofitable stocks, and also had Big Blue lagging behind legacy peers like Microsoft Corp. and Apple Inc.
While IBM may be an oasis of stability in the short term, the lack of growth that kept it from the multi-year rally in tech could also hold the stock back when the market turns. Even Crossmark's Doll, who owns the stock, said he wasn't “pounding the table” with enthusiasm and doesn't expect to be a long-term holder of IBM.
Analysts predict the company will report revenue growth of 2.5% in 2023, below the 3.8% pace of the tech sector, according to data compiled by Bloomberg. The gap is expected to be even wider in 2024, with the 5.2% growth expected at IBM less than half the 11.9% pace predicted for the overall sector.
“IBM's dividend has supported investors over the past year, but who knows if that will continue to be the case,” said Robert Stimpson, chief investment officer of Oak Associates, which has been cutting its position in IBM.
“Because fixed-income investors can get more yield out of a 10-year Treasury now, a dividend tech stock isn't as attractive if it doesn't have incremental growth opportunities. We still like tech, but other big names look more attractive here.”