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IBM’s ‘substantial’ dividend, debt take wind out of Big Blue’s sails as analyst downgrades stock

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International Business Machines Corp.’s stock was downgraded Monday after one analyst said that with Big Blue’s transformation efforts and its somewhat stable stock price over the year, there isn’t much more wind in the sails to push the price higher.

IBM
IBM,
-1.01%

shares declined as much as 1.5% to an intraday low of $134.95, as the Dow Jones Industrial Average
DJIA,
-0.27%

— which counts IBM as a component — declined 0.1%, the S&P 500
SPX,
-0.78%

slipped 0.6% and the tech-heavy Nasdaq
COMP,
-0.45%

was down about 1%.

In a Monday note, Edward Jones analyst Logan Purk downgraded IBM’s stock to a hold from a buy rating on the belief that the transformation to a more software- and consulting-focused company is already accounted for in the share price.

IBM shares are up about 1% over the past 12 months, while the Dow average is down 3.5%, the S&P 500 is off 8.6% and the Nasdaq has fallen 15.6%. With that run, year-over-year comparisons are going to be tough, and Purk said that right now, the stock is fairly valued in the $135 area.

Read: IBM posts biggest annual sales increase in more than a decade, announces 3,900 layoffs

Purk said that IBM “has largely been successful reorganizing its business to focus on the faster-growing end markets of software and consulting following the spinoff of its infrastructure-management business,” now known as Kyndryl Holdings Inc.
KD,
-3.02%
.
Investors rewarded IBM for its efforts with a stock price that bucked the 2022 trend.

Read: IBM’s layoffs aren’t helping the stock, as analysts still fret about cash flow

While Purk said that management has done an “admirable job transforming the company [by] spinning off low-growth businesses and focusing on the more attractive end markets of software and consulting,” there doesn’t appear to be any more wind in the sails.

“With the success of these moves, we do not see a meaningful catalyst that will propel shares higher,” Purk said. “The company also holds elevated amounts of debt” that, paired with the “substantial” dividend, “limits the company’s financial flexibility.”

IBM commands a 4.9% dividend yield, the fifth-highest on the Dow average, while fellow Dow tech component Intel Corp.
INTC,
-4.27%

has a 5% yield. The Dow components with higher yields are Verizon Communications Inc.
VZ,
-0.86%

at 6.3%, Walgreens Boots Alliance Inc.
WBA,
-2.43%

at 5.3% and 3M Co.
MMM,
-0.74%

at 5.1%, according to FactSet data.

Read: Morgan Stanley reverses IBM upgrade after 9 months as stock outperforms broader market

IBM reported its largest sales increase in a decade in late January, an increase of 5.5% to $60.53 billion, but Wall Street was much more concerned with free cash flow, which came in well below expectations at $9.3 billion, with a forecast of $10.5 billion for 2023. 

Read: IBM just broke a winning streak that lasted nearly three decades

Of the 30 analysts who cover IBM, 20 have buy-grade ratings, nine have holds and one has a sell rating with an average target price of $150.49, according to FactSet data.

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