rewrite this title Is IBM Finally Turning The Big Blue Ship Around? – Nanalyze

Hendrik Bessembinder’s study on the best performing stocks of all time is a fun read. The sixth name on the list – and the top performing tech stock ever – is IBM $IBM. A simple $100 investment in 1926 would have grown to roughly $17.5 million by 2023. That’s about a 13% compound annual growth rate compared to the stock market average of around 9% per year. However, over the past 20 years, the company has meaningfully underperformed the S&P 500, even with dividends reinvested. With a new CEO coming onboard six years ago, and two of our tech holdings being acquired by IBM – Confluent and HashiCorp – is Big Blue finally starting to look like more growth and less value?

IBM’s Big Turnaround Story

Typically we focus on one metric for growth stocks that trumps all else: revenue growth. After all, that’s what tech stocks are known for. In the case of IBM, it’s a value stock that dabbles in technology. An oxymoron. Since we’re holding the stock because of its dividend growth capabilities, we want to see earnings increase over time because that’s where our future dividend growth will come from. This also aligns with how MSCI defines growth stocks. They use five variables, three of which relate to earnings-per-share growth. And there are basically two ways you can increase earnings-per-share – increase revenues or increase profitability.

When it comes to revenue growth, IBM is slowly turning around the ship. Below you can see the progress made from when the new CEO assumed power in 2020.

Positive revenue growth of any kind is welcomed following the massive decline seen under the previous CEO’s tenure. Last year’s growth of 8% was promising considering it’s been 18 years since they saw revenues grow that much. Growth of only 5% is expected for this coming year, and Q1 results released just days ago showed a hint of promise, beating analyst expectations by a hair over 1%. Nonetheless, the stock dropped because everyone expected annual guidance to be raised and it wasn’t. We’re more interested in what drove that 8% growth last year because that’s likely to drive growth in the future as well.

What’s Driving IBM’s Growth

While it’s true that IBM reported 8% revenue growth in 2025, this number is a bit misleading. When cracking open IBM’s annual report, we find this handy chart that points to just 6% growth, not 8%.

That’s due to “constant currency” reporting. As a global business, IBM earns revenue in various currencies but reports earnings in the good old U.S. dollar. When foreign currencies like the euro strengthen against the dollar, it means IBM gets more bang for their buck. That’s what happened in 2025. However, the opposite can be true. If the dollar strengthens against foreign currencies, IBM’s true revenue in USD will face headwinds.

Additionally, whether IBM grew revenues by 6% or 8%, part of this growth was inorganic. When you bolt on an acquisition, you’re not comparing apples to apples. You’re comparing two combined businesses in 2025 against one business in 2024. Organically, IBM’s revenue was only said to have grown 4% in 2025.

Regardless, it’s clear Software and Infrastructure fueled IBM’s growth last year, so that’s worth digging into. Growing a lower margin segment like consulting will not have the same effect as growing a high margin segment like software. The below table helps us understand exactly why IBM has been so focused on growing their software division. It’s propping up their gross margins while fueling their revenue growth.

However, just because software businesses come with high gross margins does not mean they’re necessarily more profitable. Neither HashiCorp nor Confluent were profitable on a net basis despite having strong gross margins. That’s thanks to something called “stock-based compensation” or SBC. It’s a common practice with tech firms, especially those looking to grow quickly. They reward their high-level employees and officers with shares of company stock to incentivize them to work harder. While it’s a non-cash expense, it still shows up in the company’s earnings, which could put pressure on IBM’s results.

Specifically IBM is expected to owe about $500 million in SBC from the Confluent acquisition, resulting in the dilution of IBM’s earnings per share by about 3% in 2026 and 2027. While specific details on HashiCorp’s SBC remain unknown, IBM likely initiated new payout plans to retain HashiCorp employees. This begs the question, why did IBM make these two large acquisitions?

HashiCorp was acquired for $6.4 billion in cash and closed early last year. HashiCorp’s tools were then integrated into IBM’s Red Hat suite of software, creating an “end-to-end hybrid cloud platform.” The “end-to-end’ refers to the entire lifecycle of an application from development to deployment to management, and ‘hybrid cloud’ simply refers to the ability to run said application on multiple environments, whether that be a large cloud provider like AWS, a private cloud, or an on-premise data center. IBM liked the idea of simplifying workloads for their customers as well as accessing HashiCorp’s community of developers. It’s working out well so far, already becoming ‘EBITDA accretive’ ahead of schedule.

Confluent was acquired for $11 billion and just closed less than one quarter ago. IBM breaks out their Software division into four segments: Hybrid Cloud, Automation, Data, and Transaction Processing. While HashiCorp was directly targeted for the first two, Confluent is said to be beneficial to all four segments. It was integrated directly into IBM’s watsonx.data and IBM Z software tools from Day 1 after closing on the acquisition. The company claims this acquisition will help customers move from “data at rest” solutions where values might be stale or outdated to “data in motion” where fields update continuously, enabling new opportunities for AI agents to work in real time.

Another growth driver for IBM relating to AI is their zSystems business, which in 2025 achieved its highest annual revenue in two decades. The new z17, launched in April 2025, is marketed as the first mainframe fully engineered for the AI age, featuring the ability to process hundreds of billions of inference operations daily directly on the platform. While the broader Infrastructure segment accounted for roughly 21% of total revenues in Q1 2026, the mainframe portion remains highly cyclical, with major hardware refreshes typically occurring on a 2 to 3-year cycle.

In their recent earnings call, IBM stated that software is the “core growth engine” for their upbeat revenue targets, so it makes sense they would want to double down on expanding this area of their business, especially when Consulting is difficult to scale and Infrastructure is highly cyclical. If you’re wondering why they haven’t spun out their consulting division, it’s probably because it’s used as a sales arm to get clients to adopt solutions from the other two segments. Since we’re invested in the company for dividend growth reasons, we’d expect this strong growth to eventually flow down to the company’s bottom line and be returned to shareholders in the form of dividends.

Operating Cash Flows and Dividends

We’ll keep this very simple. Earnings-per-share or EPS is simply net income (or profits) divided by the number of outstanding shares. Now you can see why a company buys back their shares. Even if net income stays the same, earnings-per-share will increase because you have fewer shares outstanding. Now if we take net income and remove all the non-cash accounting adjustments we get operating cash flows. This is the most important number because from this we’re able to pay dividends, acquire growth, or possibly pay down debt (more on debt in a bit). Here’s a look at operating cash flows over time compared to dividends.

Plenty of money to cover the dividends, so what are they using the excess cash for? Right now it’s going into making acquisitions to fuel growth. This is why dividend growth has been so minimal. The priority is to increase growth which can fuel dividend increases in the future.

To see whether this plan is taking shape, investors can watch IBM’s “payout ratio” which shows how much of a company’s net income is paid out in the form of dividends. IBM’s currently sits around 60%, much more sustainable than the 100%+ they were seeing in 2025. As earnings increase, payout ratio declines, meaning IBM should continue to have more wiggle room to start bumping up dividends by more than just one penny per year. That’s the hope, at least.

Managing the Debt Load

Most fallen dividend champions suspend dividend growth because they’re financially unable to keep their track record. In most cases we’ve observed, this comes down to debt. Last quarter IBM’s total long-term debt was $57.7 billion. Now we need to consider the $10.8 billion in cash on their books and we get $46.9 billion in net long-term debt.

If IBM took all the operating cash flows generated over the past six years leftover after paying dividends, that would give them about $46 billion – nearly enough to have completely paid off their debt. Having debt isn’t a bad thing, in fact it’s seen as desirable only if a company can use this as leverage to grow their business faster. However, IBM’s debt is steadily increasing, with the company taking on an additional $9.4 billion in 2025 to fuel their acquisition spree.

All three major credit rating agencies (Moody’s, S&P, and Fitch) rate IBM in the “single-A” range, with “triple-A” being the best. This means IBM is considered to be on the middle to low end of “investment grade” – a good sign. While IBM’s recent acquisitions caused S&P to worry about overleveraging risks, Moody’s and Fitch weren’t concerned, expecting additional earnings to offset the impact of the increased debt load.

All three firms are currently watching something they refer to as “core EBITDA leverage” or IBM’s ability to pay off their debt using their operational income. They want to see this ratio decline, implying greater ability to pay off debt. That’s something for investors to watch closely. After the Confluent acquisition, S&P noted: “Our outlook is negative because the acquisition causes leverage to approach our downgrade trigger of above 2.5x and further acquisitions could keep leverage elevated.” While that number currently sits above 2.5x (currently 3.2x if you use net debt of $58 billion divided by core EBITDA of $17.6 billion), S&P has not downgraded the firm yet. They go on to say that they’re watching for three things to happen to avoid a downgrade: a “digestion period” of lower spending to reduce leverage, sustained revenue growth and margin expansion, and a continued suspension of share repurchases to focus on paying down debt. If those three things happen, IBM’s credit rating should be safe, and investors can breathe a small sigh of relief.

Conclusion

Our original decision to hold IBM surrounded a desire to have representation across all sectors. Even today, the technology sector has almost nothing to choose from, though Microsoft $MSFT and Qualcomm $QCOM are upcoming champions which could be more compelling than Big Blue. Nonetheless, we stick to our rules. We only ever sell a dividend champion if they stop increasing their dividend. IBM’s dividend is in little danger, and the company is showing some promise in restoring growth. If they’re able to eat their own dog food, then we’d expect they use the powers of AI to increase their margins as well. We’re more excited about the company’s prospects going forward but still aren’t convinced they’ve shed that reputation of always chasing relevancy, not leading the charge.