- IBM has reported a drop in the rate of revenue decline in recent quarters.
- The turnaround is in sight and the company should return to growth in FY2017.
- Given the current momentum in the stock price, investors should lock in the current yield as the market will likely re-rate IBM stock once the company returns to growth.
International Business Machines Corp. (NYSE:IBM) stock has been in a freefall over the last couple of years. The stock closed the last trading session at a price of $159.55, down 25.8% from its peak of $215 in 2013. IBM stock price has been bogged down by the fact that the company has seen its top line decline for 3 consecutive years, which hasn't gone down too well with the investors. However, the company has made many right moves, which has seen the stock price rise 16% in the year-to-date, outperforming the NASDAQ's 4.8% gains in the same time period.
Should you buy into the recent rally of IBM? The company has made a few recent moves which now makes it a good time to pick up the beaten down stock ahead of the rally which could lie ahead. Here are 3 reasons why IBM stock is one of the best long ideas today.
IBM turnaround is finally in sight
IBM revenue has declined consecutively for the last 3 years, falling from $104.5B in 2012 to $81.74B in 2015, a huge 21% decline.
The stock price has followed the decline losing over 25% since its highs in 2013. However, what has been encouraging has been the recent uptick in the company's bottom line. After following the top line fall in 2013 and 2014, the Net Income registered a near 10% rise in 2015.
While the annual topline is yet to show some recovery, investors should take heart from the fact that the YoY rate of decline has slowed from the low teens in 2015 to single digit declines in the latest quarters. The company reported a 2.76% YoY decline in revenue in Q2 2016, compared to a 13.45% decline in the year-ago quarter. As pointed out by another author in a recent post, IBM's revenue decline could finally be nearing the end. Going by the current trend, IBM should return to growth in FY 2017, at the latest, which should lead to a rise in the stock price.
Buy The 3%+ Dividend Yield
IBM stock currently yields a dividend of 3.38%, which is significantly higher than its 5-year average dividend yield of 2.31%. The dividend yield has ranged from a high of 4.41% to a low of 1.43%, which puts the current yield at the higher end of the range.
Investors should buy IBM stock now to lock in the 3%+ dividend yield. The yield will fall as the stock price will rise once the company returns to growth.
IBM stock is currently trading at a PE ratio of 13, which is in line with its 5-year average PE ratio. However, the company trades at a discount to peers like Hewlett Packard Enterprises (NYSE:HPE), Oracle Corporation (NYSE:ORCL), Microsoft Corporation (NSDQ:MSFT) and Accenture (NYSE:ACN), which currently trade in a PE range from 17.5 to 27.
In all probability, IBM stock will outgrow its current valuations once the market realises the company's return to growth. The coming rally in IBM stock price will be driven by a multiple expansion as well as earnings growth, as the market will re-rate the stock to reflect the growth.
IBM stock price has underperformed the broader markets over the last 3 years. However, the stock has handily outperformed the market in the last few months, as the rate of revenue decline has fallen due to growth in the strategic imperatives segment offsetting the decline in traditional operations. With the market catching wind of the company's return to growth, the stock should continue its current momentum and outgrow its current valuations. Attractive valuations, the 3%+ dividend yield and the potential for capital appreciation make IBM stock an attractive buy at the current levels.