Hendrik Bessembinder’s Study Here’s a fun article on the best performing stocks of all time. The sixth name on the list – and the best performing tech stock so far – is IBM $IBM. A simple $100 investment in 1926 would have grown to nearly $17.5 million by 2023. This is a compound annual growth rate of approximately 13% compared to the stock market average of approximately 9% per year. However, over the past 20 years, the company has meaningfully underperformed the S&P 500, despite reinvesting dividends. With a new CEO coming in six years ago and two of our tech holdings – Confluent and HashiCorp – being acquired by IBM, is Big Blue finally starting to look like more growth and less value?
IBM’s big change story
Typically we look for growth stocks by focusing on one metric that trumps all others: revenue growth. After all, that’s what tech stocks are known for. In the case of IBM, it is a value stock that is interested in technology. An oxymoron. Since we’re holding the stock because of its dividend growth capabilities, we want to see earnings growth over time as this is where our future dividend growth will come from. This also matches how MSCI defines growth stocks. They use five variables, three of which relate to earnings per share growth. And basically you can increase earnings per share in two ways – increase revenue or increase profitability.
When it comes to revenue growth, IBM is slowly turning the ship around. Below you can see the progress made since the new CEO took over in 2020.
Any kind of positive revenue growth is welcomed after the steep decline seen under the previous CEO’s tenure. Last year’s growth of 8% was promising, considering it’s been 18 years since they’ve seen this much growth in revenue. Growth of only 5% is expected for this coming year, and Q1 results released just a few days ago gave a hint of hope, beating analysts’ expectations by more than 1%. Nonetheless, the stock declined as everyone expected the annual guidance to be raised but that did not happen. We are more interested in what caused the 8% growth last year because it is likely to be the same growth in the future.
What is driving IBM’s growth?
While it’s true that IBM projects 8% revenue growth in 2025, the numbers are a bit misleading. While opening IBM’s annual report, we found this handy chart that points to growth of only 6%, not 8%.
This is due to “constant currency” reporting. As a global business, IBM earns revenues in a variety of currencies but reports earnings in good old US dollars. When foreign currencies like the euro strengthen against the dollar, it means IBM gets more bang for its buck. This is what happened in 2025. However, the opposite may also be true. If the dollar strengthens against foreign currencies, IBM’s real revenues in US dollars will face headwinds.
Additionally, whether IBM grew revenue by 6% or 8%, a portion of this growth was inorganic. When you decide on an acquisition, you are not comparing apples to apples. You are comparing two combined businesses in 2025 to one business in 2024. Naturally, IBM’s revenues were said to grow only 4% in 2025.
Nonetheless, it’s clear that software and infrastructure drove IBM’s growth last year, so it’s worth a deeper look. Growing a low-margin segment like consulting will not have the same impact as growing a high-margin segment like software. The table below helps us understand why IBM is focusing so much on growing its software division. This is boosting their gross margins while boosting their revenue growth.
However, just because software businesses come with higher gross margins does not mean they are necessarily more profitable. Despite strong gross margins, neither HashiCorp nor Confluent were profitable on a net basis. This is thanks to something called “”Storque-based Ccompensation” or SBC. This is a common practice for tech firms, especially those looking to grow rapidly. They reward their high-level employees and executives with shares of company stock to encourage them to work harder. Although this is a non-cash expense, it is still reflected in the company’s earnings, which could put pressure on IBM’s results.
Specifically, IBM is expected to owe approximately $500 million to SBC from the Confluent acquisition, which would result in IBM’s earnings per share being diluted by approximately 3% in 2026 and 2027. While specific details on HashiCorp’s SBC are unknown, IBM has likely introduced new payment plans to retain HashiCorp employees. This raises the question why did IBM make these two big acquisitions?
HashiCorp was acquired for $6.4 billion in cash and spun off early last year. HashiCorp’s tools were then integrated into IBM’s Red Hat Suite software, creating an “end-to-end hybrid cloud platform”. “‘End-to-end’ refers to the entire lifecycle of an application from development to management to deployment, and ‘hybrid cloud’ simply refers to the ability to run said application on multiple environments, whether it’s a large cloud provider like AWS, a private cloud, or an on-premises data center. IBM liked the idea of simplifying workloads for its customers as well as having access to HashiCorp’s community of developers. It’s working well so far. Is already generating ‘EBITDA’ ahead of schedule.
Confluent was acquired for $11 billion and spun off less than a quarter ago. IBM has divided its software division into four segments: hybrid cloud, automation, data and transaction processing. While HashiCorp was previously targeted directly at the two segments, 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 one after the acquisition closed. The company claims this acquisition will help customers move from “data at rest” solutions where values may be stale or stale, toward “data in motion” where fields are constantly updated, giving AI agents new opportunities to work in real-time.
Another growth driver for IBM related to AI is their zSystems business, which achieved its highest annual revenue in two decades in 2025. The new z17, launching in April 2025, is marketed as the first mainframe fully engineered for the AI era, with the capacity to process hundreds of billions of inference operations per day directly on the platform. While the broader infrastructure segment accounted for about 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 said that software is the “key growth engine” for their bullish revenue targets, so it makes sense that they would want to double down on expanding this area of their business, especially when consulting is difficult to scale and the infrastructure is highly cyclical. If you’re wondering why they haven’t created their own consulting division, it’s probably because it’s used as a sales arm to get customers to adopt solutions from the other two segments. Since we invested in the company for dividend growth reasons, we would expect this strong growth to eventually trickle down to the company’s bottom line and be returned to shareholders in the form of dividends.
Operating Cash Flow and Dividends
We will keep it very simple. Earnings per share or EPS is simply net income (or profit) divided by the number of shares outstanding. Now you can see why a company buys back its shares. Even if net income remains the same, earnings per share will increase because you have fewer shares outstanding. Now if we take the net income and remove all non-cash accounting adjustments we get operating cash flow. This is the most important number because it allows us to pay dividends, achieve growth, or possibly pay off debt (More on debt in a moment). Here’s a look at operating cash flow over time compared to dividends.
There’s plenty of money to cover the dividend, so what are they using the extra cash for? Right now it is going for acquisitions to boost growth. This is why dividend growth has been so minimal. The priority is to drive growth which can lead to future dividend increases.
To see if this plan is shaping up, investors can look at IBM’s “payout ratio,” which shows what portion of a company’s net income is paid out as dividends. IBM currently has around 60%, which is much more sustainable than the 100%+ seen in 2025. As earnings grow, the payout ratio falls, meaning IBM should continue to have more room to increase the dividend by more than just a penny per year. At least that’s the hope.
managing debt load
Most fallen dividend champions suspend dividend increases because they are financially unable to maintain their track record. In most of the cases we have seen that the reason for this is debt. IBM’s total long-term debt last quarter was $57.7 billion. Now we need to consider the $10.8 billion of cash they have on their books and we get $46.9 billion of net long-term debt.
If IBM took all the operating cash flow left over after paying dividends over the last six years, it would leave them with about $46 billion – enough to completely pay off their debt. Taking on debt is not a bad thing, in fact it is considered desirable only when a company can use it as leverage to grow its business faster. However, IBM’s debt continues to grow, with the company taking on an additional $9.4 billion in 2025 to fuel its 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 in the mid to lower end of “investment grade” – a good sign. While IBM’s recent acquisitions had S&P worried about excessive risk taking, Moody’s and Fitch were not worried, expecting additional earnings to offset the impact of the increased debt load.
All three companies are currently looking at something they refer to as “core EBITDA leverage,” or IBM’s ability to pay off its debt using its operating income. They want to see this ratio fall, which implies greater ability to repay the loan. This is something worth watching closely for investors. Following the Confluent acquisition, S&P noted: “Our outlook is negative as the leverage due to the acquisition moves our downgrade trigger above 2.5x and further acquisitions could keep leverage elevated.” While that number is currently above 2.5x (Currently if you use net debt of $58 billion divided by core EBITDA of $17.6 billion it is 3.2x.), S&P has not yet downgraded the firm. They further say they are keeping an eye on three things to avoid a downgrade: a “digestion period” of lower spending to reduce leverage, continued 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 sigh of relief.
conclusion
Our original decision to take over IBM was driven by a desire to have representation across all sectors. Even today, the technology sector has almost nothing to choose from, although Microsoft $msft and qualcomm $QCOM There are upcoming champions who may be more compelling than Big Blue. Still, we stick to our rules. We only sell a dividend champion when they stop growing their dividend. IBM’s dividend is in little danger, and the company is showing some promise in restoring growth. If they are able to make their own dog food, we would expect them to also harness the powers of AI to increase their margins. We’re more bullish on the company’s future prospects, but still not convinced they’ve lost their reputation of always chasing relevance, not leadership.
