Image Source: andrew cooke
With other fantastic ideas in technology, we see no reason to be interested in IBM’s shares.
By Brian Nelson, CFA
Readers that are interested in bottom-fishing in IBM’s (IBM) shares may have a far greater risk appetite than we do. IBM is no longer the “Big Blue (Chip)” that it once was, and while its first-quarter results for fiscal year 2018 weren’t bad, its outlook wasn’t what the market had been expecting.
The $0.06 quarterly beat on the bottom line during its first quarter of 2018 didn’t translate into raised guidance for 2018, with IBM reiterating its non-GAAP diluted earnings per share target of at least $13.80, with the GAAP-equivalent mark coming in at $11.58. Expectations for free cash flow to total ~$12 billion during the year may be optimistic, and a “realization” rate greater than 100% speaks of improved earnings quality, but free cash flow generation was a bit light this quarter ($1.3 billion), coming in below cash dividends paid ($1.4 billion).
Not only did the bottom line for the year not get the bump the market had been expecting, but investors must be aware of IBM’s leveraged balance sheet. Though the company had $13.2 billion of cash on hand, debt totaled $46.4 billion, which includes Global Financing debt of ~$32 billion. We don’t want to be overly critical of IBM, but a core business that had been in decline for so long coupled with a debt-heavy balance sheet doesn’t inspire much confidence that things are on the up and up.
We just can’t give IBM the benefit of the doubt that it will achieve $12 billion in free cash flow during 2018, especially given the off-pace $1.3 billion mark in the first quarter. The company yields ~3.8% at the time of this writing, but IBM doesn’t quite cut it as a dividend growth idea and it doesn’t quite yield enough to be considered high yield. The company’s dividend is stuck-in-the-middle, and so is its business strategy as it struggles to retain existing customers amid an onslaught of new technology.
There are much better ideas in technology than IBM, with Apple (AAPL), Intel (INTC), and Microsoft (MSFT) among our top 3 dividend growth considerations.
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Brian Nelson does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.