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The 1 Stock You've Been Overlooking For Your Roth IRA

By Robert Izquierdo – May 6, 2020 at 8:00AM

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This staid company is possible to miss, but can deliver years of income for your retirement account.

Picking stocks for your retirement account requires balancing a number of factors. The companies must possess staying power and, ideally, be resilient in an economic downturn.

That said, it's natural to prioritize up-and-coming stocks to take advantage of growth, or ones with strong earnings each year. That's why it's easy to overlook IBM (IBM -2.32%) especially in recent years. With the rise of the FAANG stocks, older tech companies such as IBM are overshadowed, and particularly so if earnings performance isn't stellar, which is the case with IBM.

However, there are reasons why this overlooked stock is a good choice for your retirement account. Let's examine the company in detail to understand why.

A jar full of coins labeled retirement next to a stack of coins and an alarm clock on a table outdoors, with a hand dropping a coin into the jar.

Image source: Getty Images.

IBM's merits

On the surface, it doesn't seem like IBM is a good pick for a Roth IRA, or any investment account for that matter. In the last five years, IBM earnings have been in a steady decline, as the chart below reveals.

Even in its most recent earnings report, for the first quarter of 2020, revenue was down 3.4% year over year.  

IBM Revenue (Annual) Chart

IBM Revenue (Annual). Data by YCharts.

Yet look below the covers, and there's a lot to like about IBM.

The company is in the midst of a transition. A new CEO, Arvind Krishna, started in April after running IBM's Cloud and Cognitive Software division. This part of the company experienced 5% year-over-year revenue growth in Q1, led by its Red Hat subsidiary's 18% increase.

IBM acquired Red Hat, a cloud computing software platform, in July of 2019 as part of IBM's strategy to focus on the growing cloud computing and artificial intelligence technology trends. In fact, cloud computing's revenue contribution to the company grew from 4% in 2013 to 27% in 2019. This growth illustrates IBM's success in aligning its organization around revenue-driving technology.

IBM is also a high-yield dividend stock, currently yielding 5.16%, which means investors can earn income while waiting for retirement. IBM just raised its dividend at the end of April, the 25th consecutive year of dividend increases, marking the company's ascension into Dividend Aristocrat territory. With a payout ratio of 64%, the company is in a solid position to continue funding the dividend while also continuing to invest in its business.

A resilient company

Along with its encouraging evolution and an attractive dividend, IBM is a resilient business. It serves large enterprise customers in essential industries such as financial services, telecom, healthcare, and government. This provides IBM with the stability to survive economic downturns. The company's $11.2 billion in cash, free cash flow of $1.4 billion, and net income of $1.2 billion at the end of the first quarter illustrate its strong financials.

Speaking of downturns, at this point, the full effect of the novel coronavirus pandemic on IBM's business is not yet known. The company indicated a "noticeable change in client priorities" in March due to the COVID-19 pandemic. As a result, the company pulled its 2020 full-year guidance.

Still, IBM's solid financials put it in a good position to weather the COVID-19 storm. In addition, IBM took action in Q1 to reduce its own expenses, generating gross annual savings of nearly $2 billion, further putting it on a stable footing to get through the current uncertainty while setting itself up to be in a good position post-pandemic.

The bottom line

IBM has existed since 1911 and possesses the financial fortitude to last many more years. Its 2019 full-year net income of $9.4 billion, up 8% year over year despite a 3.1% revenue decline, demonstrates IBM's ability to deliver solid financial health.

It isn't an exciting growth stock, but it's stable, reliable, and making changes to evolve its business based on current trends. Combine these factors with a healthy dividend, and IBM is a worthwhile investment to add to any retirement account.

Robert Izquierdo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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