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Kyndryl Hldgs Inc(KD-N)

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Why Kyndryl Stock Jumped 20% Today

Motley Fool - Wed Feb 8, 2:33PM CST

What happened

Shares of Kyndryl Holdings(NYSE: KD) soared as much as 20% higher on Wednesday, falling back ever so slightly to a 19.1% gain as of 2:30 p.m. ET. The company, formerly known as IBM's IT infrastructure services business, posted its fifth earnings report as a stand-alone company -- and it was a doozy.

So what

Kyndryl's third-quarter sales fell 5.7% year over year to $4.3 billion. On the bottom line, net losses decreased from $3.30 to $0.47 per diluted share.

Your average analyst expected a loss of $0.82 per share on revenue near $3.92 billion. In other words, Kyndryl blew Wall Street's estimates out of the water.

Moreover, Kyndryl CEO Martin Schroeter hinted at share buybacks and/or dividends in Kyndryl's future, saying:

Given the nature of our business, and once we've made clear progress in strengthening our margins, we'd expect to be positioned to ask our Board to evaluate returning capital to shareholders. We have the right strategy in place to do this, and I'm confident we have the right leadership, talent, know-how, and partnerships to execute and transform our business.

Now what

Kyndryl investors are hungry for some good news, as the stock price still stands more than 66% below the level seen at the separation in October 2021. That includes Wednesday's soaring gain, which looks less impressive from a long-term perspective:

KD Chart

KD data by YCharts.

Investors take Schroeter's financial planning seriously. He served as IBM's CFO for four years before moving up to the role of VP for Big Blue's global markets. If Martin Schroeter sees dividends or buybacks in Kyndryl's future, it's most likely a done deal.

That being said, Kyndryl has some heavy lifting to do before it can share excess cash profits with its stockholders. Free cash flow worked out to just $58 million in the first three quarters of fiscal year 2023, hamstrung by $909 million in costs related to the separation from IBM. While $58 million isn't chump change to ordinary people, it's a vanishingly small cash profit in the context of Kyndryl's $12.8 billion of revenue over the same period.

Patience is a virtue, of course. The separation expenses should fade out in calendar year 2023, giving Kyndryl a chance to show what the company can do as a truly independent business. IT infrastructure services may sound boring, but the company may drum up plenty of business in consulting and outsourcing services to enterprises jumping on the artificial-intelligence bandwagon.

Here's hoping for an IBM-like dividend and buyback policy, perhaps as early as 2024. If supported by reasonable cash flow by that point, a dividend declaration could give investors a robust reason to own Kyndryl stock in the long run.

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Anders Bylund has positions in International Business Machines. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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