IBM: Business Transformation Solidifies Dividend

| About: International Business (IBM)
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IBM reported solid Q3 results confirming the transformation remains on track.

Investors can now start focusing on improving results in 2017.

The stock provides more support around $150 due to free cash flows and capital returns that include a 3.7% dividend.

IBM (NYSE:IBM) remains a highly debated stock where bulls and bears widely disagree on the stock valuation. A prime example is that the average analyst rating is 2.9, or the equivalent of a Hold. The bear thesis continues to focus on a dying legacy business while missing the large profit machine and business shift that continues marching forward.

Source: IBM presentation

Closing at around $150 following Q3 results, the stock is no longer the massive bargain when IBM traded below $120 to start the year. The valuation though is probably better than most think as the dividend yield is historically high.

First and foremost, the company has flipped the switch on the trend of missing analyst revenue estimates. IBM had a horrible history of missing revenue estimates, partially exasperated by the currency issues.

The stock bottomed right around the Q4 report in mid-January where this trend reversed. The prime reason is that quarter after quarter of missing revenue estimates provided a negative feedback loop broken in January.

Source: Seeking Alpha earnings

Second and not least, investors can now focus on the dividend without worrying about the business collapsing. IBM hasn't solved everything that ails the company, but flat revenues combined with growth in strategic areas is a positive situation for a company with a rather large 3.7% dividend.

Strategic imperatives revenues now account for 40% of total revenues. The cloud segment alone grew 42% to reach $3.4 billion in quarterly revenues.

The progress in these strategic areas have been the keys to the investment thesis for a while now. As the downside fear was eliminated as the year started, the valuation became more evident.

One quick view of the 5-year dividend chart shows how the yield still sits at levels far above those from prior years. As well, IBM repurchases shares that further adds to the positive capital return story.

IBM Chart

A prime reason the yield equation is shifted to favor investors is that IBM has hiked the quarterly payment from $0.75 to start 2012 to $1.40 now. The stock collapsed during this time period despite the confidence the Board of Directors had to nearly double the dividend payouts.

Once the stock dips to $150 or below, IBM starts trading at 10x forward EPS estimates. The 3.7% dividend yield provides a lot of support for the stock at those levels.

The key investor takeaway is that investors need to adjust their thoughts on IBM. The company has effectively shifted to a company with a future in analytics, cloud and mobile making $150 more support than the peak.

Disclosure: I am/we are long IBM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.