Dividend play: Figurines with computers and smartphones are seen in front of an IBM logo. The firm has shifted its focus to software and is poised to benefit from AI. — Reuters
NEW YORK: One of history’s original big tech firms has been having a quiet renaissance that’s pushed its shares to their first record in more than a decade.
International Business Machines Corp (IBM) is up 28% this year, beating tech giants like Apple Inc, Microsoft Corp, Amazon.com Inc and Alphabet Inc.
The outperformance – after years as one of the more unloved tech names – has come as IBM shifted its focus to software, and with the company poised to benefit from artificial intelligence (AI).
IBM shares rose 2.2% on Wednesday to close at a record high of US$209.89. It’s the first time since 2013 that the stock has closed at an all-time high.
“This is a ‘slow and steady wins the race’ kind of stock,” said Tim Pagliara, chairman and chief investment officer at Capwealth Advisors.
While IBM is still a bit overlooked within tech, “the recent price action is evidence of how people are starting to wake up to it, and the long-term success it will have.”
IBM’s latest earnings showed bookings for AI consulting and software were double the previous quarter, and the company expects the proportion of revenue from software to increase.
Efforts to transform from its history as a legacy hardware company include the acquisitions of Red Hat in 2019 and Apptio last year.
IBM also announced a deal to buy cloud company Hashicorp Inc in April.
The company’s cloud business, which includes data that could be beneficial to training large language models, also means IBM is starting to be seen as an AI winner – and a less volatile one than more popular names like Nvidia Corp.
In the broader rotation out of high-flying tech names and into cheaper stocks, IBM is well positioned: It trades at less than 21 times forward earnings, a discount to the Nasdaq 100’s multiple of about 29.
The macroeconomic backdrop and the prospect of US Federal Reserve interest- rate cuts coming soon is also a boon for IBM.
In lower-rate environments, companies with lower valuations that pay dividends may be more attractive than more expensive counterparts.
IBM’s dividend yield is just over 3%, one of the highest in the S&P 500 information technology index.
“As rates decline, that should change the competitive environment for risk assets. Dividend stocks, mature tech stocks, those should become a bit more desirable as asset classes, all else being equal, if we’re in an environment with lower rates,” said Ahmad Ismail, managing director at Siebert Williams Shank & Co.
Even though Wall Street has been getting steadily more positive this year, fewer than half of the 23 IBM analysts tracked by Bloomberg recommend buying the tech company’s shares.
“The question from here is, is there an extra gear? It will be a challenge to find one, and hard for IBM to change its growth profile,” said Logan Purk, an analyst at Edward Jones, who has a “hold” rating.
Still, the steady predictability of the stock makes it a great fit for longer-term investors who have a 15 to 20 year time horizon or want dividend income, according to Capwealth’s Pagliara.
Brian Mulberry, client portfolio manager at Zacks Investment Management Inc, agrees.
“If I’m trying to keep my technology exposure equal and rotate down to a higher quality, more stable balance sheet, you would sell Nvidia and buy IBM today, 100%,” he said. — Bloomberg
