How to Invest in IBM

People who invest in International Business Machines (IBM -1.05%) stock are buying a vastly different business today than the one that was founded a century ago. In the beginning, the company focused on punch cards used for manually processing data, including tabulating Census records. But through the years, it diversified into a plethora of seemingly unrelated business ventures, including the well-known Weather Channel.

Today, IBM is more streamlined in its focus on hybrid cloud computing and artificial intelligence (AI). Now that it's focused on more exciting industries, investors naturally want to know how to benefit from these trends by investing in IBM stock. Keep reading to find out more.

How to buy

How to buy IBM stock

Before discussing IBM's modern-day business, it's necessary to first explain how to invest in stocks. Whether buying IBM stock or buying shares of another publicly traded company, the general step-by-step process will be the same.

The easiest way to buy stocks is by having a brokerage account. Opening a brokerage account is the first step of the process. Many modern brokerages have online trading and zero fees, and allow for the purchase of fractional shares. These are great features and, consequently, are things to look for when choosing a brokerage firm.

The second step of investing in stocks is determining an investment budget. No amount is intrinsically too much or too little. The budget just needs to be within one's means. Investing too much money in the stock market can be a recipe for financial hardship because stock returns are volatile. For unprepared investors, a financial need could force them to sell stocks at the worst possible time and lock in losses.

The third step is researching potential investments. For a business like IBM, things to research include the competitive landscape, potential competitive advantages, its revenue growth rate, the stock's valuation, and more. For alternative investment products such as exchange-traded funds (ETFs), research should include fees and past performance.

The final step of investing in stocks is placing an order. The process for each brokerage will look slightly different. Below is a screenshot of what it looks like to place an order on popular brokerage Fidelity.

When placing an order, brokerages commonly ask for certain information. Generally speaking, investors need to select the account they're trading from, input the desired ticker symbol (in this case, the symbol is IBM), specify whether the trade is for a certain number of shares or a certain dollar amount, and specify whether the order is a limit order or a market order.

Market orders will go through at whatever the price of the investment is at the moment the trade is placed. By contrast, limit orders can be set up to go through if the investment hits a desired price. For limit orders, investors also need to signal whether they want the order to stay open unless it's canceled manually. Otherwise, the order will be canceled automatically if it doesn't go through that day.

Should you invest?

Should I invest in IBM?

Selecting individual stocks for one's own portfolio is a personal process, and it's impossible to answer this question definitively. The future is uncertain. Investing in IBM stock today involves individualized opinions of where the world is heading and how IBM is positioned to capture the opportunity and reward shareholders.

IBM stock has dramatically underperformed the S&P 500 over the last decade, even when accounting for the boost dividends have provided. So, some investors may wish to avoid IBM stock altogether because of its underwhelming track record. However, that may not be a fair way to approach this investment today. IBM has completely reimagined its business in recent years and consequently deserves a fresh look.

IBM is now focused on hybrid cloud computing -- including quantum computing -- and AI. To demonstrate its commitment to these areas, management has divested parts of the business that don't line up with its new vision.

In 2021, IBM spun off Kyndryl (KD -3.23%) into its own company, divesting a large but low-margin part of its business. Then, in 2022, the company sold its Healthcare Software Assets for about $1 billion. And in 2023, it even sold The Weather Company, which owns The Weather Channel.

By trimming down, IBM is leaning into the cloud and AI trends, which appear to have strong tailwinds. According to a 2023 study by International Data Corporation (IDC), spending on public cloud services is expected to surpass $1.3 trillion by 2027, growing at an almost 20% compound annual growth rate (CAGR). In a separate study, IDC expects an even better CAGR of almost 27% for AI spending as it marches towards becoming a $300 billion market by 2026.

Management believes that large enterprises aren't going to adopt a single public cloud provider or use a single AI model. Rather, it firmly believes that the future involves a hybrid approach to both. Its software, consulting, and infrastructure businesses are all geared to helping enterprises adopt whatever cloud and AI solutions they want.

This includes IBM's ongoing work in microchip design as it looks to build semiconductor solutions that are both faster and more energy efficient.

For IBM to achieve its vision, it hasn't been as easy as simply divesting assets that are no longer core. The company has also been on an acquisition spree in recent years. IBM acquired 23 companies in 2021 and 2022 combined for a total price of about $6 billion. And in the first nine months of 2023, it acquired seven more companies for an additional $5 billion.

IBM is chasing some important secular trends, which ultimately could be rewarding for shareholders. That said, completely reimagining the business through a series of acquisitions and divestitures can be a complicated strategy to pull off.

Profitability

Is IBM profitable?

IBM is a profitable business, with net income on a trailing-12-month basis continually for roughly 30 years. Still, IBM's financials deserve a fresh look, considering all of the changes it's undergone in recent years.

IBM's best revenue growth lately has been in its software business. This is fortunate because software is also IBM's most profitable revenue segment, with a gross profit margin of roughly 79%.

As IBM's software business continues to take off, the company's cash flows are improving. However, investors do need to be aware that some of these cash flows are being poured right back into the business for research and development, as well as for acquisitions.

IBM is adapting its business to better address the global growth trends in cloud and AI. That's probably a good mindset for management to have. However, these spaces are highly competitive and subject to rapid changes as technology advances at breakneck speeds. It's imperative to spend money to stay ahead of the curve, a common need for tech stocks.

In summary, IBM is a profitable business, and its future cash-flow potential is promising. However, investors need to be aware that the company could find itself spending more money than it anticipated just to stay relevant in a rapidly advancing world.

Dividends

Does IBM pay a dividend?

Yes, IBM stock has a long history of paying dividends. Adjusting for stock splits, the dividend has been paid and increased every year for 28 consecutive years, landing IBM in elite company.

As of this writing, IBM paid dividends of $6.64 per share annually ($1.66 per share quarterly), which amounts to a 4.3% dividend yield based on where the stock is trading right now. This puts IBM stock squarely in high-yield dividend stock territory.

ETFs

ETFs with exposure to IBM

When it comes to IBM stock, there's a good chance that many investors are more interested in investing in the AI trend or in IBM's high-yield dividend. For those investors, buying an ETF might be a better option. ETFs hold multiple stocks based on a theme, giving investors instant diversification in their specific areas of interest.

For example, there's the First Trust Nasdaq Technology Dividend Index Fund (TDIV 1.0%) for investors interested in IBM's high-yield dividend. IBM stock is one of the largest holdings in the portfolio at 8.3% of the value as of November 2023. The dividend yield for this ETF is almost 2%, and the fund has performed in line with the S&P 500 over the long term.

For investors more interested in beating the market with the AI trend, there's the Global X Artificial Intelligence & Technology ETF (AIQ 1.43%). Past market-beating performance doesn't guarantee good returns in the future. But this ETF has been beating the market since its inception. IBM is one of the larger holdings in the portfolio, with 3.2% of the total value as of November 2023.

Related investing topics

Stock splits

Will IBM stock split?

IBM isn't on the list of upcoming stock splits, meaning its management team hasn't announced anything in this regard. As is often the case, investors need to use a little bit of deductive reasoning to determine whether IBM will potentially split its stock.

IBM stock has split many times in the past. But it hasn't split since way back in May 1999. Adjusting for this split, IBM stock was trading at around $220 per share at the time. And the 2-for-1 split dropped it down closer to $110 per share.

It's hard to draw concrete conclusions from information that's more than 20 years old. However, considering it trades at around $150 per share today, it would seem that IBM stock would need to go up quite a bit more before the management team would start considering a stock split.

The bottom line on IBM

IBM has been in business for more than a century, but it's not the same company that it was even five years ago. Management got rid of parts of the business and acquired other companies, building its vision of enabling hybrid cloud-computing solutions as well as a hybrid approach to AI. IBM has a strong history of profitability and rewarding shareholders. But it will need to work hard and spend heavily to ensure it outcompetes in these busy industries going forward.