This Dividend Stock Could Finally Be a Business 'Machine'

International Business Machines is a turnaround company, and one that has frustrated investors. The stock has continually lagged the market for the past several years. But, finally, IBM's turnaround appears to be gaining real momentum. The company's recent quarterly earnings provided a double-beat on the top and bottom lines. IBM also raised its dividend, maintaining its Dividend Aristocrat status. IBM has a high yield above 4%, has finally returned to growth, while the stock has a reasonable valuation. Earnings Readout Shows Progress IBM is a global tech giant that offers integrated enterprise software products, hardware and services. In the services business, IBM is the world's largest IT provider with 5.5% market share. In software, IBM's software business is mostly middleware, which is the software layer that connects applications and devices to each other. In hardware, IBM sells the z15 mainframes, storage, and more. The company generates annual revenue above $73 billion. IBM's quarterly reports have been disappointing investors for years, as the company had struggled with a long-running trend of declining revenue. But the company's most recent earnings report was a notable surprise, mostly because it finally returned to growth. For the first quarter, companywide revenue increased 1.0% to $17.73 billion. Adjusted earnings per share declined 4% year-over-year, but IBM still beat analyst expectations for both revenue and EPS. Revenue for Cloud & Cognitive Software increased 4% due to 13% growth in Cloud& Data, and 4% growth in Cognitive. Global Business revenue increased 2.4%, while Systems revenue increased 4.3% year-over-year. Future growth is likely, as IBM's multiple growth segments are performing well with strong underlying demand. IBM ended 2020 with a backlog of $104.8 billion. Management also expects to generate revenue growth for the full year in 2021. The quarterly dividend was increased to $1.64 per share after the earnings release. This is the 26th consecutive annual increase for the Dividend Aristocrat. Adding Up: Growth Ahead IBM has certainly not been a reliable growth company in the past few years, but the company's turnaround is finally paying off. Its shifted focus into growth areas such as the cloud have worked. The major acquisition of Red Hat has accelerated the company's turnaround. IBM is now focusing on cloud and SaaS - or software as a service - and intends to be a major player in hybrid cloud as illustrated by the Red Hat acquisition. This was evident in the most recent quarter. In the first quarter, total cloud revenue of $6.5 billion increased 18% on an adjusted basis, while cloud revenue in the trailing 12-month period increased 18%. Red Hat revenue increased 15% year-over-year. Such strong rates of double-digit growth shows IBM's strategic investments are finally materializing. Taking a Spin-Off Another potential catalyst is the company's looming spin-off. IBM is splitting into two companies: a new IBM with around $59 billion in annual revenue, and Kyndryl (Managed Infrastructure Services) with around $19 billion in revenue. The spin-off should be completed by end of 2021. It could successfully unlock additional value for shareholders, as the sum of the parts may be greater than the current market value of the combined company. Separately, splitting into two independent entities could provide each company with better growth prospects from having its own dedicated management team. Meanwhile, IBM continues to improve its balance sheet, a separate priority after the major acquisition of Red Hat. IBM is deleveraging after increasing debt for acquiring Red Hat. IBM divides its debt into core debt and financing debt. Debt is down $16.6 billion since the acquisition and core debt is now $38.1 billion, offset by $11.3 billion in cash, equivalents, and securities. Global Financing debt is $18.3 billion, and it is decreasing due to winding down its OEM financing. IBM's competitive strength is its brand, entrenched customer relations and extensive patent portfolio. IBM is also the market leader in mainframe computers where it has little competition. IBM is a surprisingly recession-resistant company since the company has long-term service and maintenance contracts leading to recurring revenue and cash flows. The nature of mission critical IT enterprise systems makes this unlikely to change in the near future. Reasonable Valuation, Dividend It appears IBM is at long last, progressing on its turnaround and returning to growth. In the meantime, the stock has a very reasonable valuation, with an attractive dividend, as well. Based on expected adjusted EPS of $11.03 for 2021, the stock has a price-to-earnings ratio of 13.5. Shares are still valued very cheaply, particularly in comparison to the broader S&P 500 Index. Plus, shares of IBM yield 4.5%, making the stock very appealing for income investors. And, IBM has maintained steady dividend growth for 26 years. While the company's rate of dividend growth has slowed in recent years, this is understandable given the investment needs of the turnaround efforts. But it is still a good sign that the company has been able to continually raise the dividend payout over time. With a 4.5% dividend yield and a P/E of 13.5, the stock appears to be attractive on a valuation basis and for income. After many years of frustration, IBM investors may finally be seeing their patience pay off. IBM started 2021 off on the right foot as it returned to revenue growth. The company's focus on hybrid cloud and other growth areas is seemingly taking hold. And the impending spinoff of Kyndryl could further increase shareholder value. The dividend yield is more than double the market average, making IBM an appealing high-yield Dividend Aristocrat.

This Dividend Stock Could Finally Be a Business 'Machine'

IBM has been frustrating as a turnaround name, but it's now pressing the right buttons -- and has a high yield.

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