Stocks to buy

IBM Stock Offers a Winning Combination of Growth and Value

When it comes to growth opportunities in tech, International Business Machines (NYSE:IBM) and IBM stock may not be what first comes to mind. In fact, many investors may see it as old news.

But taking a closer look, it’s clear this company differs greatly from this common perception. It may be on course to see its growth reaccelerate from here.

How? In the past year, IBM has continued to focus on faster-growing areas of tech like hybrid cloud computing. Success in this area could in time move the needle. Compare this to its low valuation and high dividend yield, and there’s a lot to like here.

IBM Stock: From Value Trap to Growth Stock?

In recent years, IBM has seen little in the way of revenue and earnings growth. With this, not only would most describe it as a value stock, many would describe it as a value trap. That is, a cheap stock that becomes even cheaper due to the lackluster performance of its operating business.

Yet in recent quarters, it appears the company has started to turn a corner. With the spinoff of Kyndryl (NYSE:KD) last November, IBM was able to further remove a major slow-growing, low-margin operating segment. Now, International Business Machines consists largely of faster-growing, higher-margin segments like hybrid cloud software, hybrid cloud infrastructure and consulting.

As a result, the company has reported solid numbers in recent quarters. For example, in its most recently completed quarter, it reported overall revenue growth of 9%. On a constant currency basis, top-line growth came in at 16%. According to Barron’s, IBM stock investors haven’t seen that type of revenue growth in over two decades.

It’s a work in progress, but IBM may be well on the path toward becoming a growth stock once again.

Value and Yield While You Wait

Despite the prospect of higher growth ahead, IBM stock continues to trade at a low earnings multiple. At today’s prices, its forward multiple stands at around 14.7x. If its growth reacceleration continues, it could easily see its forward valuation get a moderately high boost.

Coupled with increased earnings, this may result in significant upside for shares. Nearly a decade ago, the stock traded for between $175 and $200 per share. A return to such levels could happen.

In the meantime, IBM will pay you while you wait for its growth transformation to finish playing out. Right now, the stock pays out around $6.60 per share in dividends annually. That gives shares a forward dividend yield of around 4.7%. Even in today’s rising rate environment, that still counts as high yield.

Furthermore, this stock has a track record of dividend growth. The company has raised its dividend 28 years in a row. Over a long timeframe, these steadily increasing payouts can boost your total return.

The Verdict

IBM stock earns a B rating in my Portfolio Grader. Among stocks in the tech sector, there are many names with impressive growth prospects that trade at a premium valuations and have little to offer when it comes to dividends.

There are also many tech stocks that trade at low valuations, and have high dividend yields, but offer little in the way of upside potential. With this tech stock, though, you may be getting the best of all three. A winning combination of growth and value.

That said, don’t be surprised if its performance in the immediate term is underwhelming. The market is still digesting macroeconomic uncertainties like inflation, rising interest rates and a possible recession.

Nevertheless, if you have a long time horizon, IBM stock is a great opportunity. Collect a steady dividend yield all while its transformation takes shape.

On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.

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