IBM is divesting about USD 19 billion in revenue (25% of the total revenue) through spinning off its managed infrastructure services, which are part of the global technology services segment. This step is going to have an impact on IBM’s total debt and dividend. The positive aspect is that this business is facing a slow decline and its spin-off will allow IBM to focus on growth areas. These include namely a hybrid cloud and artificial intelligence according to the analysis of BCM Begin Capital Markets.

Revenues of the global technology services segment amounted to USD 26 billion, USD 27 billion and USD 29 billion in 2020, 2019 and 2018, respectively. There is no indication that it will turn around soon. On the other hand, the business is profitable and generates solid cash flows that support the dividend and debt payments.

In the company’s third-quarter earnings conference call, CEO Krishna said, “We are redefining our future as a hybrid cloud platform and AI company... For IBM, as we look forward, the case for hybrid cloud is clear... Clients see 2.5 times more value in a hybrid cloud approach versus a public only. It's a tremendous opportunity valued at USD 1 trillion, with most of the enterprise opportunity ahead of us.”

The new CEO, Arvind Krishna, is a long-term IBM veteran who has initiated a brave move to the hybrid cloud, which was the reason for Red Hat acquisition in 2019.

IBM entered the cloud late and needed to build a scale to catch up and compete with its peers in enterprise cloud – that is why they paid USD 34 billion for about USD 3 billion in annual revenues and a 20% annual growth that Red Hat reported.

Rad Hat brought hybrid cloud technology (Open Shift) and experience in hybrid cloud that IBM had lacked. Open Shift allowed IBM to quickly gain the scale needed in hybrid cloud and integrate it with other software – CloudPaks, DB2 and IBM systems.

The main attraction for investors is often IBM’s high yield.  Its dividend right now is USD 6.52, which accounts for very good 5.48% according to the close price on 19 February.

In comparison, the 10-year US Treasury is a bit over 1%. Since the forward pay-out ratio is 60%, it means that dividend is well covered by earnings. Cash flows represent USD 15 billion in the long term and the dividend required is USD 5.8 billion in the long term.

Revenue and income (in USD billion) [1]

Year 2020 Gross margin 48.32% Operating margin 6.3% Net profit margin 7.62% Return on investment 4.87% Table 1. IBM’s revenue and income

International Business Machines Corporation (IBM) is a technology company operating in five segments: cognitive solutions; global business services; technology services & cloud platforms; systems; and global financing. The cognitive solutions segment delivers a spectrum of capabilities, from descriptive, predictive and prescriptive analytics to cognitive systems. Cognitive solutions include Watson, a cognitive computing platform that has the ability to interact in a natural language, process big data, and learn from interactions with people and computers. The global business services segment provides clients with consulting services, application management and global process services. The technology services & cloud platforms segment provides information technology infrastructure services. The systems segment provides clients with infrastructure technologies. The global financing segment includes client financing, commercial financing, and remanufacturing and remarketing [2]

Tomáš Kolomazník, Analyst, BeginCapitalMarkets