Investors who wrote off International Business Machines (IBM -1.05%) after years of decline and stagnation may need to take another look. The 112-year-old company has worked to return itself to the cutting edge of today's technology industry.
It accomplished this with the purchase of Red Hat and by spinning off a stagnant managed infrastructure business into Kyndryl. Moreover, it accomplished this without alienating a longtime constituency of shareholders. Returning to the cutting edge could also make it a tech stock worth owning. Here are three key reasons why.
1. IBM's cloud offerings continue to expand
The aforementioned purchase of Red Hat in 2019 amounted to an "all-in" bet on the cloud, costing it $34 billion and dramatically increasing its long-term debt.
Fortunately, this gamble seems to have paid off for IBM. Buying Red Hat made the company a leader in the hybrid cloud. Through Red Hat OpenShift, it owns a family of containerization software products that allow entities to link public and private cloud companies more seamlessly.
Furthermore, IBM is a player in generative artificial intelligence (AI). Through IBM watsonx, users can combine AI models with generative AI, machine learning, and other tools to accelerate AI workflows. This allows users to create and deploy AI apps, scale AI workloads from a single hybrid-fused data store, and oversee an entire AI lifecycle.
Such tools seem to have served IBM well. The company is now the fifth-largest cloud provider in terms of market share. Also, Mordor Intelligence forecasts the cloud industry will grow at a compound annual growth rate of 16% through 2028. With its technology, IBM will likely take a significant portion of what could be a $1.24 trillion industry by 2028.
2. IBM's quantum computing offers significant potential
Another area of IBM leadership that may not get enough attention is quantum computing. Quantum computing combines computer science, physics, and mathematics to develop a type of computer that can manage calculations too complicated for more traditional computers.
Earlier this month, IBM released the first 127-qubit quantum chip, called Eagle. To put its power into perspective, each qubit doubles the memory space needed for various algorithms, a testament to the exponential increase in computing power that Eagle offers.
IBM did not mention quantum computing in its Q3 2023 earnings report, and it received only scant mention on that quarter's earnings call. But with its ability to solve problems, this potential could dramatically boost the stock in the coming years.
3. The IBM dividend continues to grow
IBM continues to resemble more conservative stocks in one key area: dividend payments. Despite its struggles in the previous decade, IBM increased its payout 28 years in a row. And even with the cloud stock trading at a five-year high, with its payout of $6.64 per share, the stock offers a dividend yield of 4.1% to new shareholders.
Investors will likely see the increases continue. In the first nine months of the year, free cash flow was $5.1 billion, just above the $4.5 billion in dividend costs for the same period.
Also, the company has held to a forecast free cash flow of $10.5 billion as it tends to produce more robust free cash flows in the year's final quarter. Thus, IBM can afford this dividend even as it invests to improve its technology.
Additionally, investors can purchase this income stream at a reasonable price since IBM stock sells at a P/E ratio of 21. This has increased in recent years, but compared to most of its principal competitors, the stock looks like a compelling bargain.
Consider IBM stock
After years of stagnation, IBM finally appears positioned for a recovery. Thanks to improvements in its cloud and quantum computing offerings, the company could attract increasing business.
Amid that growth, it remains a compelling dividend stock for income investors. Also, with its rising free cash flow, the dividend increases should continue.
Admittedly, its cloud market share may appear small, and quantum computing does not seem to be a major revenue source for now. But as both industries continue to grow, IBM has positioned itself well to reap the benefits for its shareholders.
