At the moment, International Business Machines (NYSE 🙂 is in the news for all the wrong reasons. The software and services giant is shedding thousands of jobs and struggling to remain competitive in an environment where newer technology companies are dominating the market. Similarly annoying, the reversal plan is on the move after the COVID-19 pandemic hit the global economy.
According to recent news reports, IBM is in the midst of massive layoffs. Without official confirmation from the Armonk, New York-based company about the exact number, it has been speculated that 20,000 workers have been released in the recent round of restructuring. That could be IBM's biggest workforce cut in a decade.
With these negative developments, the IBM stock lagged behind the comparable market recovery that started after the meltdown in March. Shares of this legacy tech giant, which dominated the early decades of the computer world with inventions such as the mainframe and later floppy disk, closed at $ 126 yesterday, down about 26% from the February high.
The main concern of investors about IBM is whether Big Blue can save its solid dividend, which delivers a robust 5.22% and returns shareholders an annual distribution of $ 6.52. But as the corona virus devastates the global economy, dividends may come under pressure as the company's largest customers cut their IT investments and competition increases.
In its latest version, things looked bleak for the tech giant's company. It recorded lower sales in the first quarter, lifted annual earnings expectations due to the pandemic uncertainty, and incurred a major restructuring expense, underscoring the challenges faced by new President-CEO Arvind Krishna to revive growth to blow.
"In the coming months, we must focus on the stability of the company and ensure that we maintain our liquidity and balance sheet," Krishna said during a conference call as reported by Bloomberg. In the future, he said, the focus will be on hybrid cloud and AI, with quantum computing "getting on the road."
The impact of the coronavirus is likely to significantly damage profits in the second and third quarters as IBM's major customers postpone the purchase of new mainframes and software. Given the stock's current valuation, we think IBM is still a safe bet for income investors who have a long-term view of the company's turnaround plan.
Recurring Revenue Stream
For starters, we see no significant impact on the company's recurring revenue stream, which mainly consists of financial services, telecom and the public sector. These economic areas have remained largely immune to the effects of lockdowns and closings and will help IBM weather the downturn.
"Our recurring revenue stream, continued growth in gross profit margin and strong balance sheet and liquidity position remain stabilizing elements in an unprecedented business environment," said James Kavanaugh, IBM's Chief Financial Officer in the latest earnings statement.
"We have taken actions within our company to provide the necessary flexibility and operational efficiency for the current environment."
The new management structure of IBM, following the departure of Ginni Rometty who stepped down as CEO in April, has brightened the prospects for the company's long-term growth after many years of declining sales.
Her successor, Krishna, led the company's cloud and cognitive software division. Jim Whitehurst, director of Red Hat, the open-source software giant that IBM acquired for approximately $ 34 billion last year, was named president of the company.
Rometty spearheaded the company's acquisition of Red Hat last year, gambling on hybrid cloud technology to reverse the lingering decline in revenue. The acquisition adds a relatively high margin software company to IBM's offering.
Red Hat sales increased 18% in the first quarter as the shift to remote work, automation, and application modernization accelerated. Overall, cloud computing revenue across multiple divisions increased 19% to $ 5.4 billion.
Bottom Line
When it comes to growth, over the past decade, IBM has certainly disappointed its investors. But after the takeover of Red Hat and with a new management, we see IBM return to a growth path once the pandemic is over.
IBM's healthy balance sheet, manageable debt and recurring cash flows make the dividend a relatively safe bet for income-oriented investors.
