The surge in inflation this year has led to soaring interest rates that have hammered most high-growth technology stocks. However, International Business Machines (IBM) has bucked the trend as investors find solace in IBM’s low valuation, high dividend yield, and cash flow, which have helped the company outperform the broader technology sector.
IBM has a price-earnings multiple of 12.4, compared with 19 for an index of technology stocks in the S&P 500. Apple (AAPL) and Microsoft (MSFT) trade for about 22 times earnings. IBM also has an indicated dividend yield of 5.4%, second only to Intel (INTC) among stocks of the S&P 500 tech index. Crossmark Global Investment said, “We will own tech stocks if their valuations are reasonable, and I can touch the cash flow, which takes us to lower PE tech stocks like IBM.”
According to Bloomberg data, IBM has only fallen -5.7% this year, including reinvested dividends, versus a 30% drop for the S&P 500 tech index. This represents a reversal from recent years, where rapid growth was the favored metric for technology stock investors, an environment that led to massive gains for high-valued unprofitable stocks but left IBM lagging. IBM will release its Q3 earnings results Wednesday.
Crossmark Global Investment said that while IBM may be an oasis of stability in the short term, the lack of growth that kept it from the multi-year rally in tech stocks could also hold it back when the overall market turns. Analysts predict IBM will report revenue growth of 2.5% in 2023, below the 3.8% pace of the tech sector, according to Bloomberg data. Moreover, the gap is expected to be even wider in 2024, with 5.2% growth expected for IBM, less than half the 11.9% pace predicted for the overall tech sector.
Oak Associates, who said they have been cutting back their position in IBM, said that “IBM’s dividend has supported investors over the past year, but who knows if that will continue to be the case. Because fixed-income investors can get more yield out of a 10-year Treasury now, a dividend stock isn’t as attractive if it doesn’t have incremental growth opportunities.”
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