tiprankstipranks
Jim Chanos: IBM May Not Cover Dividend Payments
Stock Analysis & Ideas

Jim Chanos: IBM May Not Cover Dividend Payments

International Business Machines (IBM) is an American multinational software corporation.

I’m bearish on the stock. (See Analysts’ Top Stocks on TipRanks)

Earnings, Chanos’ Bearish Outlook

Although IBM managed to beat its Q3 EPS estimate, the tech giant missed on revenue by $190 million.

The catalyst to the revenue miss was the company’s Technology Services segment, which declined by 5% from a year ago. However, a 2.5% growth in its Cloud & Cognitive Software segment and 11.6% growth in the Business Services segment provided some damage limitations.

Well-known Wall Street short-seller Jim Chanos thinks IBM is taking advantage of financial engineering in a similar vein to what Enron did before its collapse (Chanos predicted the Enron collapse). Chanos thinks the company barely generates enough net cash flow to cover its dividends.

According to Chanos: “IBM’s sustainable FCF was actually closer to $7B in 2020, and is trending to $6B in 2021. This is just enough to cover their dividend, with nothing left over. And will probably not cover it in 2022.”

Dividend Analysis

Whether or not financial engineering is considered, according to key metrics IBM’s dividend capacity already remains in question.

Sure, IBM’s yield of 5.1% is attractive, but its dividend payout ratio is 50.6% higher than its five-year average, while its five-year levered free cash flow has only advanced at a CAGR of 2.5%.

Furthermore, IBM has a poor dividend coverage ratio that’s 23.4% lower than its five-year average, and it also has $4.5 billion in pensions that remain unpaid.

Considering the mentioned metrics, alongside its interest coverage ratio being 41.4% worse off than its five-year average, it’s possible to conclude that equity investors are looking at a lower residual in 2022.

Technical Levels

For those seeking capital appreciation, it’s probably best to look at technical levels, as IBM is no longer a “growth at any price” stock.

Craig W. Johnson of Piper Sandler stated last week that “Software is trading in record-high territory after confirming support of the rising 40-week MA; RS has reversed a declining channel, while momentum has bounced back into positive territory.”

Craig also identified IBM as one of the software stocks that he thinks has the most momentum potential.

However, if the stock’s technical charts are considered, it’s notable that the RSI is at 20.9, which means IBM stock is oversold. If the RSI had been accompanied by attractive moving averages, I’d agree with Craig’s statement; however, IBM stock is trading below its 10-, 50-, 100-, and 200-day moving averages by a long way (+5% each); this alone creates worry.

Finally, according to the TipRanks 13-F filing monitor, hedge funds remain negative on IBM stock as the likes of Mario GabelliKen Fisher, and Joel Greenblatt all reduced their positions recently.

Institutional buying is an excellent leading indicator of momentum for retail investors, and based on recent events, the momentum’s trending downwards.

Wall Street’s Take

Wall Street analysts think the stock is a Moderate Buy, with an average price target of $162.13. There have been five Buy ratings on the stock, with three hold ratings, and no sell ratings.

Concluding Thoughts

According to short-seller Chanos and key metrics, IBM is in danger of not covering its anticipated dividends in 2022.

Technical levels suggest that any near-term price appreciation remains unlikely, in which case the stock’s outlook is gloom.

Disclosure: At the time of publication, Steve Gray Booyens did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates, and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices or performance.

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles