What IBM's New Free Cash Flow Forecast Means for Investors
IBM stock is higher Thursday after the tech giant beat Q2 earnings expectations and raised its free cash flow guidance. Here's what you need to know.
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International Business Machines (IBM) is leading its fellow Dow Jones stocks in Thursday's session after the technology giant beat top- and bottom-line expectations for its second quarter. What's more, IBM raised its full-year free cash flow (FCF) forecast, which is good news for investors.
In the three months ended June 30, IBM's revenue increased 2% year-over-year to $15.8 billion, driven by 7% growth in its software segment to $6.7 billion. Big Blue also said its earnings per share (EPS) jumped more than 11% to $2.43 and its free cash flow increased 24% from the year-ago period to $2.6 billion.
"We had a strong second quarter, exceeding our expectations, driven by growth in both revenue and free cash flow," IBM CEO Arvind Krishna said in a statement. "We continue to see that clients turn to IBM for our technology and our expertise in enterprise AI [artificial intelligence], and our book of business for generative AI has grown to more than two billion dollars since the launch of watsonx one year ago."
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The company's results cruised past analysts' expectations. Wall Street was anticipating revenue of $15.6 billion and earnings of $2.20 per share, according to CNBC.
As a result of its strong performance in the first half of the year, IBM raised its full-year free cash flow forecast. The company now anticipates more than $12 billion in free cash flow, which is the money left over after operating expenses and spending on assets, versus its previous estimate of about $12 billion.
This is important for investors because companies with higher levels of free cash flow will often allocate some of this money toward shareholder-friendly initiatives such as stock buybacks and dividends.
"Our business fundamentals, operating leverage, product mix and productivity initiatives all contributed to significant margin expansion and increased profit and free cash flow," IBM Chief Financial Officer James Kavanaugh said in a statement. "Our strong cash generation enables us to continue investing in innovation and expertise across the portfolio, while returning value to shareholders through dividends."
Indeed, IBM is one of the best dividend stocks for dependable dividend growth, having raised its payout for 29 straight years.
Is IBM stock a buy, sell or hold?
IBM has performed very well in 2024, rising roughly 17% as of this writing, but Wall Street remains on the sidelines. According to S&P Global Market Intelligence, the average analyst target price for International Business Machines is $184.09, which is a discount to current levels. Additionally, the consensus recommendation is a Hold.
Still, there are some bulls to be found, including in financial services firm Stifel, which has a Buy rating and a $205 price target on the blue chip stock.
"At almost a 5% dividend yield, we believe the market is discounting IBM and expects it will remain in secular decline independent of its various growth initiatives and that the current level of FCF generation, which covers capital returns and acquisitions, is unsustainable," Stifel analyst David Grossman said in a note following IBM's second-quarter earnings release.
And while Grossman admits that risk is elevated due to slower-than-anticipated revenue stabilization, he believes "the risk/reward remains attractive, given very negative market sentiment and potential catalysts over the next 12 months, which could drive both estimates and the multiple higher."
Stifel's $205 price target sits roughly 7% above where IBM is currently trading.
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