Better buy: IBM or Kyndryl?

Technology giant International Business Machines (NYSE: IBM) recently completed a long-awaited spin-off, defining Kyndryl Holdings (NYSE: KD) apart as a separate business and independently traded stocks. IBM shareholders, including Yours Truly, received 1 Kyndryl share for every 5 IBM shares in the process.

So now I’m both an IBM investor and a Kyndryl shareholder. Should I keep both or is it time to sell one and reinvest that money in the other? And then we have investors who owned zero IBM stock on November 4, 2021, asking a different question: Which slice of the old IBM entity is the best place to park new money?

What is this Kyndryl company, anyway?

Kyndryl was formed in late October when IBM implemented a spin-off plan first announced over a year earlier. The original idea was to separate the company’s managed infrastructure services from IBM’s cloud computing ambitions. At arm’s length from Big Blue’s cloud-based services and artificial intelligence (AI) tools, the new company would be a sane service provider regardless of the brand that appears on cloud servers and contracts. client.

The managed infrastructure company started with a market cap of $ 9.1 billion at the end of October. However, IBM’s market cap fell from $ 127.3 billion to $ 115.1 billion on that day, a reduction of $ 12.2 billion. As a result, $ 3.1 billion in shareholder value simply vanished as investors wondered how this experiment might play out in the long run.

You might be wondering what exactly a managed infrastructure business is. Kyndryl’s assets and operations were previously known as managed infrastructure services as part of IBM’s global technology services segment. This business plan involves the development and maintenance of the software that runs behind the scenes of any modern business, as well as a plethora of support services for these critical software assets. Kyndryl provides a wide variety of valuable IT management expertise, from network design and cloud computing to data security and IT planning.

Image source: Getty Images.

The story so far

So far, the bears are winning the Kyndryl debate. By the end of Friday, October 19, Kyndryl’s stock had fallen a further 55% since the date of registration in October, or 30% since the first day of listing. IBM’s stock fell only 4% over the same period, while the S&P 500 the stock index has not changed at all.

There was no clear reason for Kyndryl’s month-long slip. The company is not sitting on its arms, announcing new or expanded partnerships with well-known names Microsoft, Pitney bowes, and VMware along the way. Investors and analysts are not overly enthusiastic about this new, unknown investment vehicle.

Is Kyndryl Undervalued?

It remains to be seen exactly how effective Kyndryl can be as a stand-alone business. The company has not published any financial results since the completion of the split. In addition, early reports will be burdened with expenses related to the derivative transaction, not to mention adapting to a different way of doing business.

However, it seems obvious that Kyndryl’s stock is worth trading at a higher price point. IBM’s operations that would later become Kyndryl reported 2020 revenue of $ 19.4 billion. You can buy stocks at the valuation of 0.22 times that revenue. Even though income is dropping rapidly, it is too low. I can’t find a close competitor trading below 0.48 times leakage sales and the IBM mothership commands a P / S of 1.41 – and I see IBM as a great value investment.

Do math with a laptop and a calculator at the living room table.

Image source: Getty Images.

The question of the dividend

IBM is known as a generous dividend investment, offering a 4.6% return ahead of the Kyndryl spin-off. The yield jumped to 5.6% today as Kyndryl declared no payments.

This situation is likely to persist in the long term. Kyndryl’s pre-spin-off operations generated just $ 0.6 billion in free cash flow in 2020, out of $ 15.0 billion for IBM as a whole. The combined deal’s cash machine remains under the Big Blue banner, leaving little room for shareholder-friendly dividend policies at Kyndryl. Management has promised that the combined initial dividends from Kyndryl and IBM would be at least equal to the per share payments of the former IBM entity.

So if you wanted to own the old IBM for its generous dividend yields, you should also stick with the IBM name today.

The final verdict

All things considered, Kyndryl doesn’t have much to offer investors at this time. This transaction was IBM’s least exciting asset in terms of long-term growth potential. It is not a huge cash generator. The big dividends will continue to flow through IBM stocks, not Kyndryl.

I see a reason to get Kyndryl shares back now, or to keep the shares that were created by the spin-off. The stock is just too cheap, even though Kyndryl’s growth prospects are bleak. Of the 1,618 stocks on the US stock exchanges with a market capitalization of at least $ 4 billion (Kyndryl stands at $ 4.2 billion), only 12 have lower price / sell ratios than this ticker.

So I think it would be unwise to sell my Kyndryl shares at these unreasonably low prices, and bargain hunters might even want to buy Kyndryl shares, expecting an upward price correction relatively soon. Such a large price difference seldom lasts very long.

Other than this valuation wrinkle, I see no reason to be excited about Kyndryl’s stocks and would much rather focus on IBM – which always strikes me as a fantastic growth stock at a reasonable valuation, plus the one of the richest dividend yields in the tech industry. .

IBM is the big winner here, from almost every conceivable angle.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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