N.B.: There's a note at the end of every Motley Fool article disclosing the writer's financial positions. While I don't own IBM stock, lots of my family members have worked, or still do work, for IBM.
One hundred years ago, IBM (NYSE:IBM) had fewer than 2,000 employees. Today, the company employs over 400,000 people around the world. IBM's stock had been on a steady rise for a half-decade, however, in the middle of last year things slowed down, and over the past 12 months the stock has fallen 13.5%, while the S&P 500 has risen 16.5%. The sharpest fall happened just a month ago, when IBM reported a weaker-than-expected third quarter and a shift in strategy.
Even with the recent fall, IBM is still one of the strongest companies in America. The business has $9.5 billion in cash on hand and a market cap of $160 billion, and it's been growing its dividend for over a dozen years. With its recent drop, the dividend currently yields a tasty 2.75%, and investors should be looking for a way in.
Cash flow is strong at IBM
In the first three quarters of this financial year, IBM has generated free cash flow of $8 billion and paid out $3.2 billion in dividends. That gives the business plenty of room to grow the dividend if the rest of the business starts to slow down. The cash flow has also helped the company fund stock repurchases. Over the past five years, IBM has reduced its outstanding share count by 25%.
The reduction in share count and the constant increase in dividend have brought all kinds of value to shareholders. IBM's free cash flow means that it can continue to grow its dividend -- as it has been doing -- without putting the pinch on its continuing operations. Dividend investors looking for something now and something more down the line should be very happy with the current cash setup at IBM.
The shift of focus supports IBM in the future
One of the biggest surprises from this past quarter's earnings statement was an announcement about a strategic shift and increased investment in future business. That comes at the expense of short-term earnings, but it's meant to set IBM up for bigger things down the road. Specifically, the company announced that it's beginning to move away from its traditional service and software business and toward a software-as-a-service, or SaaS, model.
Analysts have said the transition needs to be happening faster, and IBM CEO Virginia Rometty agreed, saying that the results for the third quarter were disappointing. The shift is necessary, and it seems as if IBM now has its ducks in a row to make its SaaS proposition a reality sooner rather than later. That's going to support investors over the coming years, as IBM catches up with the rest of the technology world, much of which has already made the SaaS shift.
The IBM brand is still valuable worldwide
With a solid business history and a name brand that almost everyone in the world knows, IBM has a cushion to fall back on if it needs to. When investing in stocks for a dividend or for the long term, it's often prudent to think about worst-case scenarios. What is this business going to be worth if everything goes badly? According to Interbrand, IBM's brand alone is valued at $72 billion. While a valuable brand isn't reason enough to justify buying a stock, it does act as a solid backstop for investors. Even if the business were to fall apart, it would still have value simply in its name.
IBM is a company that's been through dozens of major shifts in its core business since it first launched; this most recent shift isn't going to suddenly break it. Investors looking for a company that can weather the storm while still paying out a solid dividend should look further into IBM.