I have had a love/hate relationship with IBM for a long time.
On the one hand, it’s an American staple that successfully spun off its PC business back when it could get a good deal for it. On the other hand, it insists on wasting BILLIONS of dollars on share buybacks that do nothing more than help its executives meet their targets before they ship the stock back out the front door as executive stock options. But, and this is the kicker, IBM kicks out a very sweet dividend. Even when the stock trades sideways, earning 4% in a zero-interest environment with an almost zero chance of bankruptcy, it a great investment.
Check out my Stash stock back review.
Now, IBM is doing another thing that I don’t really like. IBM is listening to short-term investors who don’t like steady, but non-growth income. Instead, these shareholders want stock price appreciation, even at the cost of a long-term stable business. That means the board wants price appreciation. That means the CEO only earns those millions in bonuses if the stock price goes up, even if the company prints money during the day. As a result, IBM is spinning off its managed infrastructure services business. The new company will be called Kyndryl, which is dumb. (I didn’t get a lot of sleep. The name is dumb, but usually, I’d find a way to say that more diplomatically.)
The official version is this:
The company said “kyn” alludes to the word kinship, while “dryl” comes from “tendril,” alluding to new growth. Together, the name brings “to mind new growth and the idea that–together with customers and partners–the business is always working toward advancing human progress,” Schroeter said.IBM’s Services Spinoff Gets a Name. What ‘Kyndryl’ Means. | Barron’s
If you say so.
IBM’s new CEO says that that the software and solutions portfolio (cloud businesses) will make up the majority of company revenue after these parts of the company floats away.
It will take several quarters before investors get enough data to know what is left behind and how it compares with the old stability of a nice solid dividend stock. Conservative investors have no business getting in now. But, what about investors who already own shares of IBM stock?
IBM will separate its Managed Infrastructure Services unit of its Global Technology Services division intoIBM Strategic Update
a new public company (“NewCo”). This creates two industry-leading companies, each with
strategic focus and flexibility to drive client and shareholder value.
Translation? We hope people will think of IBM as a shiny, new, growth company that focuses on what is currently popular in tech.
No matter how many businesses IBM spins off, it won’t be a growth stock. No matter how many times the new CEO says, “trillion dollar opportunity,” it won’t be a growth stock. That doesn’t mean it won’t be a volatile stock, especially as investors get used to the new, slimmer IBM, at the same time as they get used to the new IBM CEO. But, does that make IBM stock a sell?
Well, that “trillion-dollar opportunity” does come with Amazon, and Microsoft as competitors both with a huge head start.
But, the only thing that matters is that dividend.
See my Credit Karma review.
That seems to be missing from the news coverage.
If you’re looking for growth in the technology sector, you’re looking in the wrong place. So, does spinning off legacy businesses make the company more or less likely to keep paying that juicy 4% dividend? Management says that the dividend will be the same but split between the two companies. No word on how much of the dividend ends up with either.
Following separation, the companies together are initially expected to pay a combined quarterlyIBM Strategic Update 2020 Press Release
dividend that is no less than IBM’s pre-spin dividend per share. Following the completion of the
separation, each company’s dividend policy will be determined by its respective Board of
I wouldn’t rush to sell off my IBM shares, but it’s time to start looking around for another technology-based dividend company… maybe one that will grow into a nice, solid 4% dividend. I wish I’d have sold this out and jumped into Apple back when it was paying a nice juicy dividend. At least you know what you are going to get out of Apple for the next several years: more Macs, more iPhones, more Tablets, and huge Appstore income, and no spinoffs.
Hey, you know who already did this spinoff thing? HP. HPE has a near 3% dividend yield and HP has 2.3%… can’t help but wonder what dividend a combined HP/HPE would be paying. Oh well. At least Meg Whitman got all her bonuses.
About the Author
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson owned IBM shares, but he is having doubts about continuing that position. However, that may change at any time without notice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.