Investors and analysts aren’t exactly bursting with excitement over this unknown new investment vehicle. The Motley Fool has no position in any of the stocks mentioned. IBM is giving up around $19 billion of annual revenue by spinning off Kyndryl, but it’s not giving up all that much free cash flow.

• IBM still retained 20% of Kyndryl’s outstanding shares following the spin-off, but it plans to sell that entire stake this year.
• Each IBM shareholder received one new share of Kyndryl for every five shares of IBM they held.
• Last November, IBM (IBM -1.97%) completed its spin-off of Kyndryl (KD -2.32%), the managed infrastructure services segment of its Global Technology Services segment.
• We expect that the distribution of Kyndryl common stock will be tax-free to holders of IBM common stock for US federal income tax purposes, except for cash that stockholders may receive (if any) in lieu of a fractional share.

Just as happened with HPE Enterprise Services, Kyndryl hopes that by flying the IBM nest, this will indicate to customers they can buy more than just IBM stuff from Kyndryl. “We are better able to integrate technology and expertise to solve our clients’ problems, regardless of whether the solutions come from IBM, our business partners, or even our competitors.” GTS had made a pre-tax adjusted profit of $67m last year but reported a net loss of $2.011bn after audit, advisory, legal, and restructuring charges were accounted for, according to an SEC filing in September. With revenues declining, IBM chose to lay off workers in GTS, cutting costs to counter a shrinking top line. In 2011, the business unit turned over $40.88bn and at the end of 2020 that had tumbled 37 per cent to $25.81bn [PDF].

Kyndryl Holdings Inc. shares rallied in the extended session Tuesday after the managed infrastructure-service company posted a surprise break-even quarter and forecast pretax profit this year. Kyndryl estimates that its current addressable market is $415 billion. That market is expected to grow by 7% annually, reaching $510 billion in 2024. Kyndryl’s biggest growth opportunities over the next few years will be public cloud managed services, data services, security services, intelligent automation services, and managed services for edge environments. Kyndryl is still the largest player in the managed infrastructure and implementation services space, and it generates roughly twice as much revenue as its top competitor, DXC Technology (DXC -2.34%). Without IBM holding it back, Kyndryl could leverage that market-leading position to aggressively expand and start growing its revenue again.

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Kyndryl was created in late October when IBM followed through on a spinoff plan that was first announced more than a year earlier. The original idea was to detach the company’s managed infrastructure services from IBM’s cloud computing ambitions. Last November, IBM (IBM -1.97%) completed its spin-off of Kyndryl (KD -2.32%), the managed infrastructure services segment of its Global Technology Services segment. Each IBM shareholder received one new share of Kyndryl for every five shares of IBM they held. While Kyndryl has a large market opportunity, managed infrastructure services is a labor-intensive business. Kyndryl will have around 90,000 employees, so revenue per employee will be just over $200,000.

This operation was IBM’s least exciting asset in terms of long-term growth potential. The big dividend payouts will continue to flow through the IBM stock, not Kyndryl. It remains to be seen exactly how effective Kyndryl can be as a stand-alone business.

Prior to the distribution, IBM delivered 80.1% of the issued and outstanding shares of Kyndryl common stock to the distribution agent, Computershare Trust Company, N.A. Computershare was the distribution agent in connection with the distribution and is the transfer agent and registrar for both IBM and Kyndryl. By the end of Friday, Oct. 19, Kyndryl’s stock had fallen another 55% since the date of record in October, or 30% from the first day of public trading.

Financials

Kyndryl also doesn’t pay a dividend yet, since its operations only generated a low single-digit percentage of IBM’s FCF in previous years. However, IBM might also eventually cut its dividend, which currently boasts a high forward yield of 4.9%, to free up more cash for that expansion. If that happens, IBM will lose its status as a Dividend Aristocrat of the S&P hycm review 500. We’d like to share more about how we work and what drives our day-to-day business. Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

The company has not reported financial results since the spinoff was completed. Moreover, the first few reports will be burdened with expenses related to the spinoff transaction, not to mention the adjustment to a different way of doing business. The spun-off services biz, which sounds vaguely like decongestant medication or a Pokemon depending on how old you are, was dreamed up by marketers earlier this dowmarkets year. Apparently the name “invokes the spirit of true partnership and growth.” It is a fusion of kyn, derived from kinship, and dryl, drawn from tendril. I believe IBM’s profitability, dividends, and clearer plans for the future make it a better buy than Kyndryl right now. If Kyndryl can actually secure more customers by breaking free of IBM’s legacy ecosystem, it might be deeply undervalued right now.

IBM Cast Off Kyndryl. Here’s What Investors Should Do With the Stock.

IBM reported revenue of $73.6 billion and free cash flow of $10.8 billion in 2020. Excluding Kyndryl, revenue would have been $57.5 billion and free cash flow would have been around $10 billion. Measuring the profitability of a business that’s still part of a larger parent company can be difficult. On an unadjusted basis, Kyndryl produced a pre-tax loss of $1.8 billion and a free cash flow loss of $0.3 billion in 2020.

By leveraging Red Hat’s open source software, it plans to provide AI-powered hybrid cloud services that are cross-compatible with AWS, Azure, and other public cloud platforms. IBM believes that flexible transformation will enable it to grow its annual revenue by the mid-single digits and its annual free cash flow (FCF) by the high single-digits from 2022 to 2024. High-growth stocks tend to represent the technology, healthcare, and communications sectors. They rarely distribute dividends to shareholders, opting for reinvestment in their businesses. More value-oriented stocks tend to represent financial services, utilities, and energy stocks.

IBM Earnings Beat Estimates. The CEO Says Tech Demand Remains Strong.

Management promised that the combined initial dividends of Kyndryl and IBM would at least be equal to the old IBM entity’s payouts per share. IBM is known as a generous dividend investment, offering a yield of 4.6% before the Kyndryl spinoff. The yield has surged to 5.6% today while Kyndryl hasn’t declared any payouts at all. The company is not sitting on its hands, announcing new or expanded partnerships with household names Microsoft, Pitney Bowes, and VMware along the way.

Kyndryl is free cash flow positive if you make some adjustments

Details have been scarce on the spinoff since it was announced in late 2020. On Tuesday, Kyndryl filed its Form 10 registration statement with the SEC that filled in some of the blanks. Kyndryl shares were distributed on the evening of November 3 to shareholders of IBM, who received one Kyndryl share for every five IBM shares owned. IBM has temporarily retained 19.9 percent equity ownership of Kyndryl following this distribution. Kyndryl is led by Martin Schroeter, who previously spent more than a decade at IBM. Some investors might find Schroeter’s experience reassuring, but Kyndryl might need to hire an outsider with fresh ideas to turn around its massive business.

IBM Earnings Are Coming. What to Expect.

It was also unprofitable throughout all three periods — but it generated a slim profit on a pro forma basis after excluding the spin-off costs. Mohan cited several encouraging takeaways after IBM’s management provided an update on the business post the spin-off of Kyndryl. Recently, Bank of America Securities analyst Wamsi Mohan maintained a Buy rating on the stock with a price target of $176, implying 25.3% upside potential to current levels. The transaction had no impact on the number of shares of IBM common stock that you own. Unless you sold or otherwise disposed of your IBM shares, your balance before and after the transaction remained the same. All things considered, Kyndryl doesn’t have much to offer investors right now.

IBM has finally cut loose its multi-billion-dollar managed infrastructure business, renamed to Kyndryl, sending 90,000 staffers into a life that is less big and less blue. Arvind Krishna, IBM’s former cloud chief, succeeded Ginni Rometty as IBM’s CEO in 2020. Krishna focused on expanding Red Hat (which IBM acquired for $34 billion in 2019) as the foundation of its hybrid cloud and AI business, then orchestrated Kyndryl’s spin-off to accelerate review thinking, fast and slow that transformation. Kyndryl’s stock opened at $31.50 on Nov. 3, but it now trades at about $17 per share. That divergence wasn’t surprising, since IBM framed the spin-off as a way to jettison its weakest businesses to invest in more promising markets. IBM distributed to its stockholders, as a pro rata dividend, one share of Kyndryl common stock for every five shares of IBM common stock outstanding as of the record date of the distribution.

Data are provided ‘as is’ for informational purposes only and are not intended for trading purposes. Data may be intentionally delayed pursuant to supplier requirements. On 3 November 2021, International Business Machines Corporation (“IBM” or “we”) distributed 80.1% of its interest in Kyndryl Holdings, Inc. (“Kyndryl”) to holders of its common stock. Holders of IBM common stock received one share of Kyndryl common stock for every five shares of IBM common stock held as of the close of business on the record date, 25 October 2021. These numbers don’t necessarily reflect how Kyndryl will perform once it’s officially a stand-alone company.