Long a favorite for investors, tech stocks have suffered this past year. Some of the tech stocks driving innovation have lost more than two-thirds of their value over the past few months thanks to macroeconomic headwinds.
At the same time, some tech stocks that did not gain significant traction in recent years are now attracting new interest amid the downturn. Two of these companies are International Business Machines (IBM -0.32%) and Verizon Communications (VZ -0.03%). Let's find out a bit more about these two tech stocks beating the market in 2022.
Admittedly, IBM has struggled over the past few years. Investors turned away from the stock as its slow-growth legacy business hampered the company's financials.
That appears to be changing. While many of its peers have lost value, IBM is a tech giant that has held steady. This year, its stock has risen by about 1.3% as it continues its massive transformation.
This occurred in large part because IBM has transformed itself into a cloud stock. One change that boosted IBM was its $34 billion purchase of Red Hat in 2019. That move made it a major player in the hybrid cloud, which integrates private clouds, public clouds, and on-premise systems into a single infrastructure. Secondly, it spun off its managed infrastructure business, which now operates as Kyndryl.
The financials, which stockholders received favorably, may have also helped push the stock higher. First-quarter revenue came in at $14.2 billion, 8% higher than the year-ago quarter. This already exceeds a goal set by CEO Arvind Krishna, who wanted to achieve mid-single-digit revenue growth post spinoff. Also, that revenue figure includes $5 billion in hybrid cloud revenue for the quarter, a 14% increase during that period.
Moreover, net income for the quarter came in at $733 million. This fell from year-ago levels, but only because the company earned $551 million from discontinued operations in Q1 2021 compared with only $71 million in the most recent quarter. Income from continuing operations grew 64% during that time to $662 million, while the company reported a quarterly free cash flow of $1.2 billion.
And while the company was somewhat vague about its revenue outlook for the full year (it called for "growth at the high end of the mid-single digit range"), it guided to between $10 billion and $10.5 billion in free cash flow for the year. With about $1.5 billion in quarterly dividend expenses ($6 billion yearly), it should cover its $6.60-per-share annual dividend, which yields around 4.8%. This is the 27th consecutive year it has raised the dividend.
Admittedly, the rising stock price has increased valuations, and it now sells for 23 times earnings. Still, that's cheaper than Amazon and Microsoft, its cloud competitors, which sell for 45 and 30 times earnings, respectively. With that low multiple and generous payout, IBM could become the stock of choice for cloud investors seeking dividends.
Like IBM, Verizon has become a rising dividend tech stock. While its share price is down about 5.9% since Jan. 1, its total return is down only about 3.6%, thanks mainly to its dividends. While that may not sound like a stellar performance, it avoided the 11.9% drop in the S&P 500 total return during that time.
Its annual dividend of $2.56 per share yields about 5.2%. Moreover, that payout has risen every year since 2007, a long enough time frame for the yearly dividend hikes to have become an expectation.
Furthermore, with the rise of 5G networks, Verizon exercises oligopoly power over the market. It has spent tens of billions of dollars in capital expenditures to build a network that continues to win the most J.D. Power awards in network quality.
Also, its C-band spectrum purchase enabled Verizon to serve more areas with 5G and helped lead the company to the largest number of broadband net additions in over a decade. Additionally, it has heavily promoted its network-as-a-service (NaaS) business that will build an additional revenue stream connecting devices and objects.
But despite such offerings, sluggish growth has plagued the stock. First-quarter revenue of $33.6 billion grew only 2% from year-ago levels. Also, net income came in at $4.7 billion, a 12% decline over the same period. Items not directly related to core activities offset lower income tax and interest expenses.
Moreover, the company guided to the "lower end" of revenue guidance for 2022. Still, the 9% to 10% revenue growth previously predicted means a significant improvement from the Q1 growth level. Also, forecasts for 2022 adjusted earnings per share are between $5.40 and $5.55. That would amount to a 12% increase in earnings at the midpoint.
Admittedly, a P/E ratio of 9.5 is slightly higher than AT&T's earnings multiple of 8.1. Nonetheless, that valuation, along with the considerable dividend return, gives investors good reason not to underestimate Verizon's stock.
Editor's note: An earlier version of this story contained outdated dividend information for IBM and it mischaracterized IBM's revenue guidance for 2022.