IBM stock is rising, but this future dividend aristocrat has a key risk

The International Business Machines (IBM) stock price is firing on all cylinders as investors cheer its ongoing growth and exposure to artificial intelligence (AI). It has risen in five consecutive months and is sitting at an all-time high of over $221. Its year-to-date gains are 40%, giving it a market cap of over $203 billion.IBM’s slow growth is continuingIBM, also known as the Big Blue, is a leading technology company offering global businesses numerous products and services. Unlike firms like Microsoft and Google, IBM has no products that targets retail clients. IBM’s business is made up of several segments. It is a large player in the consulting industry, where it helps other firms integrate technologies. The company has a large software business and an infrastructure division. In software, the the Big Blue is a big player in areas like automation, security, and transaction processing. Also, its infrastructure division comprises IBM Z and distributed infrastructure. IBM provides its services to thousands of companies globally, such as Bank of America, Walmart, Visa, and Citigroup. Its business has been going through a major transformation under Arvind Krishner. The biggest change was its decision to spin off its Kyndryl business, a company valued at over $5 billion that offers solutions like applications, cloud, cybersecurity, and artificial intelligence.By spinning off Kyndryl, IBM reduced the number of its global employees by over 56,000. It also separated from a company that has, historically, had low margins. The most recent financial results revealed that Kyndryl had a gross margin of 19% and a net income margin of minus 1.21%. IBM, the remainco, on the other hand, has a gross margin of 56% and a net income margin of 13.3%. Its margin numbers are much higher than the industry median of 49% and 3.62%.The other key decision that IBM made was to acquire RedHat in a $34 billion deal. This buyout gave IBM a platform that helps businesses deploy, run, and manage data applications on-premises and on multiple public clouds. Altogether, financial results shows that IBM’s revenues have been growing in the past few years. Its annual revenue jumped from $56 billion in 2019 to over $61.8 billion in the last financial year, a 6% increase. IBM’s growth has been much slower than other tech companies. For example, Oracle’s revenue rose from $39 billion to $52 billion in this period, a 13% increase, while Microsoft’s rose by over 71%. Cisco, another old-tech company’s revenue rose by 8.16%.IBM’s slow growth is continuingThe most recent financial results showed that IBM’s quarterly revenue rose by 2% in the last quarter to $15.8 billion. This revenue growth was only driven by its software business, which made $6.7 billion.The other two segments – consulting and infrastructure – dropped by 1% to $5.2 billion and $3.6 billion, respectively. These numbers mean that, despite the ongoing trends in AI, IBM’s revenue growth has stalled. Besides, the American economy is growing at a faster rate than the company.Analysts expect that IBM’s growth will continue being slow in the coming months. Its annual revenue of $63.2 billion will be a 2.2% increase from last year. IBM’s revenue will then grow slowly to $66.30 billion.Overvalued dividend aristocratIBM stock has jumped likely because of its strong track record of rewarding shareholders. It has a dividend yield of 3.02% and has constantly grown its dividend payouts for 24 years. Its last five-year dividend growth rate was 1.80%, lower than other companies.Therefore, since IBM has raised dividends for 24 years, and has a payout ratio of 65%, there are odds that it will become a dividend aristocrat.The challenge, however, is that IBM has become a highly overvalued company trading at a forward P/E ratio of 24.4 and a forward EV to EBITDA ratio of 16.2.IBM is cheaper than other big names like Microsoft, Google, and Amazon because of its slow revenue and market share growth. IBM stock price analysisIBM chart by TradingViewThe weekly chart shows that the IBM share price has been in a strong bull run and has moved to the highest point on record.It recently flipped the important resistance point at $195.5, its highest point in March this year. By moving above that level, the stock invalidated the double-top pattern that was forming IBM’s oscillators like the MACD and the Relative Strength Index (RSI) have all moved upwards and are in their overbought levels.Therefore, the IBM share price will likely retreat and retest the important support level at $195.51 in the coming months. The key event to watch will be its earnings on October 23rd. Analysts expect these numbers to show that its revenue rose to $15 billion in the third quarter.The post IBM stock is rising, but this future dividend aristocrat has a key risk appeared first on Invezz