As far back as 1911, IBM has been leading the IT industry with a wide variety of offerings such as hardware, software, and services like cloud computing, servers, mainframe computers, and more recently AI tools.
Today, the company is also known for helping businesses achieve their digital transformation goals through its innovation in the fields of quantum computing and AI. Regarding the latter field, IBM offers an AI platform called Watson and is planning to release a new AI suite called watsonx. What’s the story when it comes to its stock though?
Now, many investors are optimistic about the short-term direction of the markets. Wells Fargo Advisors, however, offers a contrarian view. Based on their analysis, the period ahead in 2023 is going to continue being rough marked by potentially slight interest rate increases. Their projection is an economic recession with lower earnings in 2023 than the S&P 500 consensus estimates. But they believe a recovery is on the horizon while we move through 2024. Based on this, the stock may be facing a hard time in the short term.
In any case, what we want to achieve with this article is to inform you what Wall Street expects from IBM’s stock price, the growth prospects of the business, and the current state of the company’s dividend.
- 1 – Analyst forecasts for IBM vary, but there is a consensus that suggests an upside, albeit small.
- 2 – The dividend appears to be safe with a low likelihood that it will be cut any time soon, but the yield is not significant when compared to short-term Treasury Bill rates.
- 3 – There is an ongoing growth story because IBM has recently announced its plans to release new AI solutions to businesses.
IBM Stock Forecast for 2023
There are currently 13 Wall Street analyst firms offering forecasts for IBM. The median price target of $140 per share suggests a 10% increase from the trading price as of 5/19/2023. The highest price target is $162 and the lowest is $110.
As you can see, analysts consider the stock a buy right now. But we can’t help but notice that the upside suggested by the median price target is very small as it concerns the next 12 months. At the same time, we should also add that if the dividend isn’t cut for the next 12 months, buying the stock now could mean an additional 5% return in dividend income.
For a bit more context, let’s take a look at the financial results of the company for the first quarter that was released on April 25, 2023:
- EPS came at $1.36 and beat the $1.26 projection by FactSet.
- Sales missed the expected $14.35 billion and barely beat the Q1 revenue figure of 2022 ($14.25 billion versus $14.20 billion).
- Free cash flow guidance for the fiscal year is at $10.5 billion
We should also note that the market responded well to the above results at the time, with more than a 3% increase in after-hours trading.
Now that you understand the price projections and the latest results of the business, let’s talk about the growth prospects.
At its annual Think conference, the company introduced an upcoming suite of generative AI offerings named “watsonx”, which are reflective of its research department’s continuous efforts to remain competitive in the AI space. During the presentation, IBM revealed 3 components of the new suite: WatsonX.ai which is related to building/deploying AI models, WatsonX.data for managing data, and WatsonX.governance for helping to track the process of model creation.
Additionally, the company revealed its proprietary foundation models, of which a code-generating tool and a Large Language Model (LLM) for text-based applications were included. They also previewed industry-specific model applications related to IT, geospatial, and chemistry operations, which can be run on-premises, in the cloud, or a hybrid environment.
Further, IBM presented Sandstone, Granite, and Slate; these are model architectures that provide various trade-offs between performance and cost. Regarding such offerings, the company mentioned that in order to accommodate varying computing requirements, there are going to be models of different sizes.
Last, the company introduced some Watson tools like Watson Discovery and Watson Assistant, which are focused on individual users and productivity tasks.
Clearly, these announcements are reflective of the company’s strategic approach to generative AI, highlighting the main software offerings and the ever-developing significance of generative AI in the industry. BMI seems determined to grow along with this part of the industry and though there are many challenges ahead, investors have a lot of developments to look forward to.
In any case, such developments are likely to affect the stock in the future, so you should know what to keep tabs on.
IBM Stock Dividend
IBM has been distributing a dividend since 1916 to shareholders. Interested investors should pay attention to the current dividend yield and factor it in when it comes to projecting their potential gains in holding the stock.
Recently, the board of directors approved a very small increase in the quarterly cash dividend to $1.66 per share which reflects a 0.61% increase from the last payout. This is, of course, insignificant and we could say that right now the company is merely trying to at least maintain its payout.
The next dividend is scheduled to be distributed on June 10, 2023, to the shareholders of record as of May 10, 2023; therefore, if you invest now you will not receive the upcoming dividend. Regardless, it’s important that you understand what the dividend’s state is if you are interested in investing in the company for the long term.
In theory, your dividend return for the next 12 months would be 5.22%, based on the forward EPS and the trading price as of 5/19/2023. However, there’s a risk that projected EPS targets are not met or, worse, the dividend is cut.
With that being said, a dividend cut is unlikely because of IBM consistently increasing the payout in the last 28 years. Although, we should note that in the last 4 years, the increases have been insignificant. That doesn’t undermine the ability of IBM to continue paying a dividend, but it does highlight the fact that management is reluctant to increase it, which by itself is a red flag.
Another interesting fact is that the current dividend yield places the stock at the top sixth percentile within the S&P 500 and it puts IBM at third place in the index among companies with more than $100 billion in market capitalization when it comes to the dividend yield.
Besides the history of the dividend payments, looking forward, it seems that the managers expect decent results during the rest of the year with enough free cash flow to preserve the distributions. At the same time, based on the trailing 12-month earnings per share and the recently announced dividend, the payout ratio is at 62.21%, which is a bit high compared to the 5-year average of 49.48% for the company and the sector median of 31.21%. Of course, that doesn’t mean the company will have issues paying its declared dividend; after all, it has guided for higher EPS. It’s just something that investors should keep in mind while considering this stock.
Last, you should also consider how attractive the current yield of IBM is in the current economic environment. Right now, the 3-month Treasury Bill rate is at 5.14%. Within the context of such a small spread, the yield provided by IBM does not appear very attractive.
In conclusion, the estimates for IBM indicate varying degrees of optimism. At the same time, however, the upside suggested by the median price target highlights a general conservatism when it comes to forecasting its future performance.
Additionally, its dividend appears to be safe right now and the yield is high compared to most companies with about the same size as IBM. But it doesn’t seem significant when compared to the short-term Treasury Bill rate which is currently only slightly lower.
With that being said, there’s a developing growth story regarding the business. It’s evident that with the recent introduction of the watsonx suite, IBM aims to enhance its offerings in the field of generative AI. But it remains to be seen how successful such efforts will be.
That depends on many factors, some of which are your personal investment goals and risk tolerance. As it stands, IBM has some promising prospects regarding its AI offerings. Its dividend yield is also good when compared to what many stocks can offer right now. However, the upside suggested by the consensus estimates is not very attractive right now.
Based on the 13 analysts providing 12-month price forecasts for the stock, the median target is $140. The highest estimate is $162, while the lowest estimate is $110. The median estimate suggests a 10% increase from the last trading price of $127.27.
The dividend of IBM has been increasing for a long time, though recent increases have been insignificant. Going forward, the company seems able to cover the dividend payments. So, the dividend yield appears safe at the moment.
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