Summary:

• IBM (IBM.US) stock price trades around 52 week lows
  
• Business restructuring has been slow but high dividend yield could attract investors
  
• Average target price from brokerage houses implies a 12% upside for the stock

IBM is one of the largest company listed on Wall Street. The IT giant has had difficult times of late – earnings have disappointed and a development of the cloud computing technology has trailed behind its major peers such as Microsoft and Amazon. Nonetheless, IBM still rewards investors with a high dividend yield as the stock of price has declined.

From peak to low

The last six months were not successful for IBM’s shareholders as the stock lost as much as $40. Bleak financial results were among reasons why the stock has suffered even as Wall Street indices climbed to all-time highs. The company reported a decline of profits over the course of the past 21 quarters on the annual basis. Taking a closer look at the latest financial report for Q2 2017 there was a decrease of revenues by 5% yoy to $19.29 billion. It’s worth stressing that the amount missed the consensus by as much as $160 million. EPS amounted to $2.97 which means a decline of almost 1% drop compared to the same period last year. That said, this figure turned out to be better than expected as the street’s call suggested EPS at $2.74. The company said in its statement that feebler earnings are a consequence of a transition to the new business model. Let’s underline that the firm has chosen to develop the cloud computing technology, analytical tools and software for mobile devices. Nevertheless, revenues from those business line have been insufficient to cover losses from other activities such as software for companies and hardware production. It’s worth mentioning that IBM develops the blockchain technology which constitutes a cornerstone for a majority of cryptocurrencies including Bitcoin (BTCUSD on xStation5). That technology could have the promising future, however the jury is still out if IBM is able to morph possible advantages into profits.

The ongoing transition to a different business model has weighed on the stock price. Source: Bloomberg

Solid dividend policy

While this transition process investors is cumbersome a solid dividend policy may be a magnet for investors. A noticeable decline of the stock price has led to a rise of the dividend yield to 4.23%, the 16th among 100 US technological companies from the NASDAQ index. Even as the stock price drop’s effect has mattered in lifting the dividend yield, face value of a payment in an annual basis has remained at a decent $6. This is especially true when we weigh that yield against an average one among that sector which stands at ca. 1.4%. It stems mostly from the fact that many technological companies are in a dynamic development stage, hence generated cash is reinvested rather than directed to shareholders.

IBM has a relatively high dividend yield compared to an average in the technological sector (16th position among 100 US technological companies). Source: dividend.com

Financial metrics look attractive 

P/E is one of the most common metrics which serves as a tool to evaluate of stock’s valuation. Looking through that indicator one could reason out that IBM is relatively under-priced. The P/E for IBM for the last 12 months equals 11.75. In turn, the forward P/E is at 10.31 which is much less compared to an average in the sector (16.6). On top of that, the IBM’s P/E has subsided below the current levels just twice over the course of recent 17 years.

P/E for IBM suggests the stock could be undervalued. Source: Ycharts

Recommendations from brokerage houses point to cautious optimism

Brokerage houses that share their targets with Bloomberg appear to be rather cautious when it comes to the future of IBM. 6 out of 27 recommendations suggest ’buy’, 4 calls indicate ’sell’ while as many as 17 settle for ’hold’. However, the average price target is at $162, nearly $20 above the spot price.

6 out of 27 recommendations suggest ’buy’, 4 calls indicate ’sell’ while as many as 17 settle at more neutral ’hold’. Source: Bloomberg

Technical analysis – is it already time to buy the stock?

After reaching a multi-month high in March (the highest level since October 2014), the stock price has been moving down continuously. There was a lot of momentum as the price remained below descending moving averages (50-, 75- and 150-day). This downward move has been halted at around $140 although a reversal remains uncertain. There’s been a breakout of a local level but a surge above the 50-day moving average (currently close to $147) or a downtrend line ($149) is needed as a confirmation that the bear market is a thing of the past.

The stock price has been moving down since March. However, a rebound from $140 could give hopes for a larger pullback. Source: xStation5

Roundup

By and large, IBM has large potential as it’s still placed among the largest players in the IT field.  Nevertheless, the firm has trailed behind its peers and, as a result, some investors have decided to sell their stakes. It’s worth tracking if the IBM is able to develop the blockchain technology which, in a due time, could support the core business. Finally, investors could be lured by solid dividend policy guaranteeing a stable and relatively high dividend yield.