When Arvind Krishna took over as CEO in April 2020, International Business Machines (IBM +1.13%) looked like a fundamentally different company. Krishna had previously headed IBM's cloud and cognitive software division and persuaded the previous CEO, Ginni Rometty, to approve the $34 billion acquisition of open-source software specialist Red Hat the previous year.
Almost four years after Krishna's tenure began, IBM has transformed itself into a cloud company. The question is, how much has that benefited its shareholders?
NYSE: IBM
Key Data Points
IBM's growth under Arvind Krishna
If you bought $10,000 in stock on the day Krishna took over IBM and reinvested any dividends paid out over that time, you would have roughly $19,720 today. The stock itself would be worth just over $16,000, with dividend income accounting for the remainder.
IBM Total Return Level data by YCharts
An investment in the S&P 500 over the same timespan would have generated a total return of around $20,500, so IBM slightly lagged the index. Nonetheless, Krishna's leadership appears to have helped reverse a long-term downtrend in IBM stock that was going on before he took over. The stock had lost more than half of its value between 2013 and the beginning of the pandemic in 2020. IBM's longtime shareholders were likely pleased.
Arvind Krishna's IBM
Interestingly, Krishna's move to buy Red Hat before he became CEO was likely the defining move of his tenure. To make that purchase, IBM had to take on about $23 billion in new debt, taking the total debt to around $73 billion. At the time, IBM claimed less than $18 billion in equity, so a failure to turn things around could have led to doubts about IBM's future.
Instead, the move appears to have been largely successful, as IBM is now among the leaders in the hybrid cloud market, an ecosystem allowing public and private clouds to interact seamlessly. Krishna followed this by acquiring numerous smaller cloud companies to draw a more extensive knowledge base under IBM's umbrella. Today, it is the fifth largest cloud provider.
Image source: Synergy Research Group.
Krishna also spun off the managed infrastructure business into a separate business called Kyndryl. This has allowed IBM to unload a slower growth segment and offer a greater focus to that industry.
IBM's finances
Admittedly, both bulls and bears will find something to like in IBM's financials. The aforementioned $73 billion in total debt that IBM held as it closed the Red Hat deal has fallen to just over $55 billion as of the end of the third quarter of 2023, reducing strain on the balance sheet.
Additionally, Krishna has maintained IBM's streak of rising dividends. In 2023, IBM approved its 28th consecutive annual payout hike. The payout of $6.64 per share annually offers a dividend yield of just over 4%, nearly triple the S&P 500 average of about 1.5%. Since the company forecasts $10.5 billion in free cash flow for 2023, it easily covers yearly dividend costs of just over $6 billion.
The challenge IBM continues to have is revenue growth. It brought in more than $44 billion in revenue in the first nine months of 2023, rising by just over 1%. This lags behind peers like Amazon and Microsoft.
Still, it improved income from non-core functions such as currency exchange and interest income. This enabled IBM to earn $4.2 billion in net income in the first three quarters of the year. That stands in contrast to the same timeframe in 2022 when the costs of the Kyndryl spinoff and other factors led to a net loss.
Stock price growth in the Arvind Krishna era
Ultimately, IBM shareholders have benefited from Krishna's leadership. While the total return fell just short of the S&P 500, it improved considerably from the last decade, when IBM shares lost value.
The defining move was Krishna's role in buying Red Hat, which helped make IBM a force in the cloud industry. The Kyndryl spinoff has also fostered the company's transformation, allowing more of a focus on cloud growth.
With such successes, the company can still afford to keep its generous payout, making it the dividend stock of the cloud. That eventually may lead to IBM outperforming the S&P 500 during Krishna's tenure.
