IBM Earnings: What Investors Should Expect

By Timothy Green Markets Fool.com

International Business Machines (NYSE: IBM) expects to return to earnings growth this year, and investors will be looking for solid results and reiterated guidance when the IT giant reports its first-quarter results on April 18. IBM's adjusted earnings per share peaked in 2013, declining for three-straight years as the company worked feverishly to transform itself into a cloud and cognitive computing powerhouse. That effort, while seemingly glacial at times, is now beginning to bear fruit.

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What analysts are expecting

IBM doesn't provide quarterly guidance, only an annual adjusted earnings per share (EPS) target. That target for 2017 is at least $13.80, slightly above the average analyst estimate of $13.78. For the first quarter, analysts are expecting IBM to produce $2.35 in adjusted EPS, which is flat compared to the first quarter of 2016.

Analysts aren't expecting IBM to return to revenue growth anytime soon. The average estimate calls for a 1.6% year-over-year decline during the first quarter, a 1.6% decline in 2017, and a 0.1% decline in 2018. This outlook may end up being overly pessimistic, especially with earnings set to grow this year.

Image source: IBM.

One thing that complicates IBM's earnings: The company doesn't back out one-time items, even from its adjusted earnings numbers. 2016 was chock-full of one-off charges and benefits, and the company expects the first quarter to feature complications, as well. A discrete tax benefit is expected to boost EPS, while other actions are expected to partially offset that gain.

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IBM has beat analyst expectations for both earnings and revenue for the past five quarters after a long streak of missing on revenue. The first quarter could make it six in a row if IBM posts stronger-than-expected results.

Look for more turnaround progress

All of IBM's growth businesses, areas where it's investing heavily, are lumped together into what the company calls strategic imperatives. These strategic imperatives accounted for 41% of total revenue in 2016, while growing by 13% -- an impressive result given the size of IBM. Total revenue still slumped, as the rest of the business suffered declines. But the inflection point where growth in newer businesses begins to outpace declines in older businesses appears to be near.

Cloud computing is one area within IBM's strategic imperatives that investors should focus on. IBM's cloud business spans infrastructure as a service, platform as a service, and software as a service, as well as private and hybrid cloud solutions. The company brought in $13.7 billion of cloud revenue in 2016, up 35%. Cloud delivered as a service reached an $8.6 billion annual revenue run rate, up 61% year over year.

A big part of IBM's cloud revenue is software as a service. Like many traditional software companies, IBM has been moving to a subscription business model over the past few years. This shift has the tendency to cause a decline in software revenue, since revenue that was once received up front gets spread out into the future. IBM's software business returned to growth in 2016, adjusted for currency, an indication that this new recurring revenue has become large enough to counteract declines in traditional software sales.

A dividend hike is almost guaranteed

IBM typically announces its annual dividend hike in late April, soon after its first-quarter report. Last year, it came on April 26. IBM has raised its dividend for 21 years in a row, and it's paid quarterly dividends without fail since 1916. Another dividend hike is almost certainly coming this year, which will push that streak up to 22 years and put IBM on the path to becoming a Dividend Aristocrat.

The size of the dividend increase may not be all that impressive. IBM's earnings have been declining for three years, and earnings growth in 2017 will be sluggish, according to the company's guidance. IBM paid out $5.60 per share in dividends in 2016, about 40% of its earnings guidance for this year. There's room for the dividend to grow faster than earnings, but I wouldn't be surprised to see IBM be conservative with this year's dividend increase.

IBM has reached an important milestone in its transformation -- predicting the first annual earnings increase since 2013. The stock has soared since bottoming out in early 2016, up nearly 40% from its multi-year low. With the stock still trading for just 12.3 times earnings guidance, continued progress can push the stock much higher in the coming years.

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Timothy Green owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.