IBM Is Set For The Next 10 Years

| About: International Business (IBM)

Summary

IBM's yield is 3.4%, even though profits are down.

IBM will raise its payouts in 2017 and beyond.

Because of the hybrid cloud and cognitive computing, IBM is positioned well for the next 10 years.

IBM's (NYSE:IBM) dividend yield is 3.4% and the IT behemoth looks ready to boost its payout in 2017. The company has been reinventing itself for the last few years by means of acquisitions and strategic partnerships. Still, despite spending billions on acquisitions, IBM is a cash flow engine. It's like the company is printing money in the back room. The money-making engine is expected to generate $12 billion in free cash flow for 2016.

The company's goal is growth through acquisitions, as IBM positions itself as the leader in cloud computing and cognitive computing. The third-quarter report of 2016 marked IBM's eighteenth uninterrupted quarter without revenue growth. At the same time, the company has maintained its track record of payouts for one-hundred years, increasing the payouts over the last twenty-one years.

In 2016, IBM paid out 44.6% of its free cash flow, $5.35 billion. Right now, IBM's quarterly dividend sits at $1.40. In 2006, IBM's quarterly dividend was $0.30. You can see that the increase over the last ten years has been significant. The fact that IBM ranks dividends high on its priority list was emphasized by CFO Martin Schroeter, when he stated, "We will absolutely continue to grow the dividend, and then to the extent that we have excess capital to return, we will return it. And over the long term, that number from a share repurchase would be a 2% to 3% reduction."

In other words, IBM will continue to spend billions on buybacks every year.

Now, what makes me think IBM is ready to begin revenue growth? First, according to Schroeter, in 2017, IBM will be reducing what Schroeter called "remixing skills." Second, IBM's acquisition of Sanovi Technologies confirms IBM's dominance in the hybrid cloud. Third, in September 2016, IBM launched its AI deep learning server, the only server that utilizes Nvidia's (NASDAQ:NVDA) NVLink technology. Fourth, on December 6, IBM launched a new cloud service called Bluemix Continuous Delivery, a tool for DevOps integration. Fifth, IBM Watson Health has hooked up with Siemens Radiology and In Vitro Diagnostics to aid physicians in making faster and more precise diagnoses.

IBM Watson Health appears to be sitting on the farthest edge of future healthcare, which gives the company a huge upside over the next five years. Moreover, IBM's Watson is already changing the face of cyber security. Tractica predicts that the AI sector will grow from its current level of $643.7 million to $36.8 billion over the next eight years.

At the present juncture, because of all the spending on acquisitions, over $5 billion through the first three quarters of 2016, IBM's cash flow is weak, yet is still expected to be $12 billion for 2016. If IBM is capable of that kind of cash flow with zero revenue growth, imagine what it could do once revenue begins to grow.

Despite the fact that IBM's profits are still sliding, analysts still expect IBM to increase the payout in 2017. More than likely, IBM will announce the increase in the middle of 2017, which means investors still have time to hop on the dividend train. 3.5% is a pretty good payout.

Investors should look for IBM's revenue to increase slightly in 2017, and then when Intel's (NASDAQ:INTC) and Nvidia's chips catch up with cognitive computing (Watson) applications, IBM will look like LeBron James at his best, going high and scoring points. Revenue will flow. In addition, look for IBM to increase the payout to around $1.50 or $1.55 halfway through 2017, with substantial yearly increases for the next ten years.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

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