Big Blue's big transformation
A forward P/E ratio of 11.3 and a 3.5% dividend yield makes International Business Machines Corporation (NYSE: IBM) too alluring for dividend investors to ignore, especially since it'sknee-deep in transforming itself from a stodgy PC and networking company into a cloud, analytics, engagement, and security giant.
IBM's shares have rallied 18% this year because sales associated with its "strategic imperatives" are running at an annualized $30.7 billion pace. IBM's cloud business revenue is clocking in at an annualized $11.6 billion exiting Q2, and given that the globalpublic cloud servicesmarket could reach $204 billion this year, up 16.5% year over year, there's plenty of market share left to conquer.
If IBM continues to capture share in this massive market, then it should be able to keep building on what is truly an impressive dividend track record.The company has paid investors a dividend for 100 years and it has increased its dividend payout in each of the past 21 years, including a 7.7% hike in April.
Admittedly, IBM's transformation isn't complete and slowing sales in its legacy businesses is creating profit headwinds. After reportingearnings per share of $14.92 last year, industry watchers think IBM's EPS will fall to $13.51 this year. Nevertheless, IBM is still a handsomely profitable company that's kicking off plenty of cash flow, so picking up shares now while they're trading at a low double-digit multiple to next year's earnings makes a lot of sense to me.
Microsoft's plans are paying off
IBM's not the only technology giant undergoing big changes that dividend investors ought to consider buying. Microsoft Corp. (NASDAQ: MSFT)is also transitioning itself into a cloud giant and its 2.5% dividend yield and forward P/E of less than 18 makes it a compelling buy, too.
In its recently reported fiscal fourth quarter, Microsoft's productivity and business processes segment sales increased 8% in constant currency to $7 billion and intelligent cloud segment sales increased 10% in constant currency to $6.7 billion. That growth more than offset headwinds from slowing PC business, resulting in overall year-over-year companywide constant currency revenue growth of 5%.
Microsoft thinks it can generate $20 billion in commercial cloud revenue in 2018, and if so, that would mean some pretty nice upside from here for that business. Commercial cloud sales were running at an annualized $12.1 billion clip last quarter.
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