IBM (IBM 1.25%) recently reached a significant milestone in its multi-year reinvention of itself. In November, IBM completed spinning off portions of its legacy businesses into a new publicly traded company called Kyndryl Holdings.
IBM executed this move to concentrate on the parts of its business centered around cloud computing and artificial intelligence technologies. I previously recommended waiting to invest in IBM pending the Kyndryl spin-off.
Now that the separation is complete, is it a good time to invest in IBM? To answer that question, we have to understand how the loss of Kyndryl affects IBM and if the remaining businesses make Big Blue a worthwhile long-term investment.
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Kyndryl's impact
Kyndryl provides IT infrastructure services, and its large customer base of 4,000 clients meant Kyndryl delivered a sizable chunk of IBM's revenue. Through the first three quarters of 2021, IBM reported revenue of $54.1 billion. Kyndryl accounted for $14.1 billion of that. But while Kyndryl contributed substantial sales to IBM, it's been a drag on revenue growth. Kyndryl's $14.1 billion this year represented a drop from $14.4 billion in 2020.
Despite being an established business, Kyndryl isn't profitable. Its 2021 net loss through three quarters increased to $1.6 billion from the prior year's $1.3 billion. IBM's total 2021 net income over the same period was $3.4 billion.
With the declining Kyndryl business spun off, investors are left with the most appealing aspects of Big Blue. IBM's cloud computing businesses have seen steady revenue growth. Over the past 12 months, the company's overall cloud revenue rose 14% year over year.
Its cloud and cognitive software segment, which represents the heart of IBM's business post-Kyndryl, saw Q3 revenue rise 2.5% year over year to $5.7 billion. Year-to-date revenue for this division reached $17.2 billion, up from $16.5 billion in 2020.
This year's revenue growth is no fluke. The cloud and cognitive software division has consistently increased revenue over multiple years.
| Year | Total Cloud & Cognitive Software Revenue |
|---|---|
| 2020 | $23.4 billion |
| 2019 | $22.9 billion |
| 2018 | $21.9 billion |
DATA SOURCE: IBM.
Other factors in IBM's favor
IBM's success isn't limited to its cloud and cognitive software segment. The company's global business services division added $4.4 billion to Q3's revenue growth, a year-over-year increase of 11.6%.
The global business services segment includes IBM's consulting arm, which saw Q3 revenue increase 17% year over year as it helped clients implement Big Blue's cloud solutions. Global business services, together with the cloud and cognitive software division, represents more than 70% of IBM's revenue profile after the Kyndryl separation, according to CFO James Kavanaugh.
Investors who waited to buy shares until the Kyndryl spin-off enjoy another benefit: a high-yield dividend. IBM provides a dividend yield of over 5% as of this writing, while Kyndryl currently offers no dividend. This continues IBM's unbroken streak of consistently paying a dividend since 1916.
IBM's dividend is powered by its capacity to generate free cash flow. The company has produced over $10 billion in free cash flow annually for over a decade.
Despite the revenue lost with Kyndryl's departure, IBM retains the bulk of its capability for generating free cash flow. For example, in 2020, IBM produced $10.8 billion in free cash flow. Stripping out the Kyndryl contribution, IBM would retain about $10 billion of that free cash flow.
Starting in 2022, IBM expects high single-digit growth in free cash flow, continuing through 2024 for a cumulative total of about $35 billion. This growth comes from an estimated increase in revenue of about $3 billion each year through 2024.
To buy or not to buy IBM stock
After Kyndryl's separation, IBM is a compelling opportunity for investors. Granted, the company isn't going to overtake larger rivals in the cloud computing space any time soon. Still, Big Blue has successfully carved out a piece of the cloud computing pie for itself with its hybrid cloud strategy.
The hybrid cloud approach is particularly appealing to certain industries, including the financial services field. It combines the low cost of a public cloud solution, such as that offered by Amazon, with the private cloud businesses, such as banks, that need regulatory compliance and added security to protect sensitive data.
IBM's track record of revenue growth for its cloud solutions illustrates its offerings are winning over customers. Combined with forecasted revenue growth for the next several years, its consistent ability to generate free cash flow, and a hefty dividend, this makes Big Blue a stock worth investing in.
