IBM Dividend Safety, Payout, Growth & Much More
The IBM stock dividend is substantial.
However, IBM stock has been a poor performer in my dividend investment portfolio. Fortunately, IBM is one of my smaller holdings.
On the other hand, it’s small because the stock price hasn’t gone up. In fact, I have an unrealized loss on my shares.
And I have considered selling on a number of occasions. To realize that loss for tax purposes.
But IBM’s dividend yield is high and attractive. I ask myself, how will I replace it in my portfolio?
IBM Stock Dividend Review
So, before I take any action, let’s work through an IBM stock analysis and IBM dividend review. Maybe you have the same questions that I have.
Such as, is IBM a good dividend stock? Is the IBM dividend safe?
I will answer these questions. Plus, many more. Let’s dive in, shall we.
Disclosure: This post contains referral links.
IBM Company Background
IBM is a global leader in the technology sector. They operate across a broad area of the technology product and service spectrum.
Their products and services include:
- Infrastructure and technical support
- Cloud computing
- Artificial intelligence
As a technology company, IBM’s products and services are very broad and deep. In fact, they have been criticized for being too complicated with a lack of integration across product strategies. Clients can easily be overwhelmed by choice and complexity.
IBM Business Strategy
IBM’s legacy hardware and software operations are stagnant. The company is focusing on high growth business areas to counteract the shortfall.
They call their growth opportunities strategic imperatives. These areas include newer technologies like artificial intelligence, cloud computing, and the internet-based ledger technology, blockchain.
Red Hat Acquisition
To accelerate growth, IBM acquired Red Hat in 2019.
Red Hat is a provider of open source software solutions. They are assisting with the innovative capabilities that IBM must develop to stay competitive and grow.
IBM funded the Red Hat acquisition with a mix of cash and debt. They also suspended share buybacks to protect the IBM stock dividend and reduce debt-to-equity levels.
Red Hat Acquistion Announcement
Here is an excerpt from IBM’s press release announcing the acquisition with some important financial details:
The acquisition of Red Hat reinforces IBM’s high-value model. It will accelerate IBM’s revenue growth, gross margin, and free cash flow within 12 months of closing. It also will support a solid and growing dividend.
The company will continue with a disciplined financial policy and is committed to maintaining strong investment-grade credit ratings. We will target a leverage profile consistent with a mid to high single-A credit rating. The company intends to suspend its share repurchase program in 2020 and 2021.
Red Hat And IBM’s Dividend
Paying large sums of money for acquisitions can put a company’s dividend payment at risk. It sometimes makes me question management’s capital allocation and money management practices.
I like that IBM has suspended share repurchases rather than freezing or reducing the dividend. I also like the statement supporting a solid and growing dividend.
But these expectations and forward-looking statements from the past require close attention now that the acquisition has been closed for more than a year.
I do not want to get caught in a situation where the IBM stock dividend is at risk of being reduced. With IBM stock underperforming in recent years, IBM dividend safety is very important.
So let’s move on with our IBM stock analysis and review IBM’s dividend metrics next.
Does IBM Pay Dividends?
Yes. As a shareholder of IBM stock, you will receive regular dividend payments.
The company has a long, rich history of paying dividends to its shareholders. And there is a lot to like about the current size of IBM’s dividends. Specifically, IBM’s dividend yield.
But, dividend growth has slowed in recent years. And IBM’s dividend payout ratio has been increasing.
So, let’s cover all the facts and figures pertaining to the IBM stock dividend now. Because, when it comes to managing my money, I only invest in stocks that pay dividends.
IBM Dividend Per Share
The company pays an annual forward dividend of $6.52 per share.
IBM Stock Dividend Yield
Based on IBM’s stock price at the time of the article, the IBM stock dividend yield is 5.4%.
IBM has a high dividend yield, for a blue-chip stock. It is just above my preferred dividend yield range of 3-5%.
A high dividend yield can indicate a dividend that is at risk of being reduced. But, there’s much more to come before I make any conclusions about IBM’s dividend safety.
How Often Does IBM Pay Dividends?
IBM pays dividends every 3 months or 4 times per year. Each quarterly dividend payment is $1.63 per share.
When Does IBM Pay Dividends?
IBM dividends are paid in March, June, September, and December of every year.
The company targets the 10th day of these months to pay dividends to its shareholders. When the 10th falls on a weekend or holiday, IBM’s dividends are paid on the business prior to the 10th.
What Is The Ex-Dividend Date For IBM?
As a dividend investor, you must complete your purchase by a stock’s ex-dividend date. In order to receive the next IBM dividend payment.
IBM’s ex-dividend date falls in the month prior to when its quarterly dividend is paid. The ex-dividend date is usually at the end of the first week of the month.
IBM’s ex-dividend date is slightly different each quarter. It depends on how the calendar falls. So, it’s a good idea to check IBM’s investor relations website for the exact date.
IBM Stock Dividend History
Like I mentioned earlier in this IBM stock analysis, the company has a long and rich history of paying dividends. This is what I mean by that statement…
IBM has paid consecutive quarterly dividends since 1916. The last IBM stock dividend increase marked the 25th consecutive year IBM has increased its quarterly cash dividend. This moves IBM from Dividend Achiever status and up into a higher classification. More on that now…
Is IBM A Dividend Aristocrat?
A Dividend Aristocrat is a company included in the S&P 500 stock index that has increased its dividends annually for at least 25 years.
So, with their 2020 dividend increase, IBM has attained the status of Dividend Aristocrat!
Will IBM become a Dividend King?
By increasing their dividend for 50+ years in a row. I’m not sure about that. They have a long way to go.
IBM Dividend Growth Rate
We now know that IBM dividends have been increased for many years. But, what about dividend growth?
Let’s see what the IBM dividend growth rate looks like next.
Table 1: Historical IBM Dividend Growth
|1 Year||3 Years||5 Years||7 Years|
As shown in the table above, dividend growth has slowed in recent years.
Did IBM Raise It’s Dividend This Year?
Earlier this year, IBM increased its dividend by a very small amount. The announcement indicated that only a .6% increase would be offered up.
This year’s tiny dividend increase didn’t surprise me. IBM is telling us they need to conserve cash by temporarily suspending their share buybacks to support the Red Hat acquisition.
That message makes me assume large dividend increases from this company in the next few years are unlikely.
IBM Dividend Policy
I know IBM has a dividend policy. In my opinion, every company has a dividend policy. Whether they choose to communicate it, or not.
IBM’s announcements and actions hint at their dividend policy. But, I’m not aware of any specific communications from management on this topic.
But, allow me to read between the lines. And craft IBM’s dividend policy from what they have said to the investors.
A Dividend Policy Statement In The Red Hat News Release
For example, the Red Hat acquisition announcement gave us some clues.
“The acquisition of Red Hat…will support a solid and growing dividend.”
A View On Dividend Policy From IBM’s Dividend Increase Announcement
And so did the 2020 IBM dividend announcement. Arvind Krishna, IBM’s CEO said:
“IBM’s free cash flow and our strong balance sheet give us the confidence to both invest aggressively in cloud computing and AI technologies, while also returning value to our shareholders.
Mr. Krishna continued on. His comments were more specifically about dividends and what they mean to IBM’s shareholders.
We remain fully committed to our dividend even during this unprecedented time. And, we recognize the importance of the dividend to our more than 2.3 million investors in IBM.”
Reading Between The Lines To Understand IBM’s Dividend Policy
These statements from the company indicate to me that IBM’s dividend policy is to:
- Ensure the safety of the current dividend, and
- To continue its growth in future years.
I like the messages that are being communicated. Specifically, a safe, growing, consistent stream of dividend income for investors.
Let’s move on with our IBM stock analysis by looking at some of the business fundamentals. Let’s see if they back up IBM’s statements about its dividend.
IBM Revenue Trend: Its Influence On The Stock & Dividend
Our IBM stock analysis would not be complete without a look at revenues. Topline growth or lack thereof is a hot topic for IBM.
Chart 1: Historical IBM Revenue Trend
This wouldn’t be a big concern if IBM operated in a more mature industry. But technology is still a growth business. Especially given the unprecedented events of 2020.
It has been well documented. IBM has struggled to transition its business from older declining technologies to newer growth technologies.
These struggles are seen in their declining revenue trend over the past several years. Lower revenues mean rapid dividend growth from IBM is a thing of the past.
A few thoughts on IBM revenues that I have observed…
During the 4th quarter of 2017, IBM reported higher revenue for the first time in 23 quarters. At the time, they signaled continuing growth in 2018.
And it appeared their forecast was correct. They reported successive quarters of revenue growth. However, that situation changed in the middle of 2018 as growth faltered.
2019 And 2020 Revenues
And 2019 continued the decline. With more deterioration in site for 2020. It is clear that sustainable revenue growth is still a challenge for IBM.
Let’s see how earnings are holding up. And what IBM’s dividend payout ratio tells us.
IBM Dividend Payout Ratio Based On Accounting Earnings
As the chart below indicates, it is a positive sign that IBM’s dividend payout ratio had been hovering around 50% of earnings per share for several years.
But in 2019, it jumped. To a still manageable 60%. This indicates a fair and consistent dividend safety level. At least, in the near term.
Chart 2: IBM Dividends And Earnings
Note that 2017 and 2018 earnings per share have been normalized in the above chart for the one-time impacts from the 2017 tax reform act.
Let’s talk a little more about IBM’s earnings.
Share Buybacks Support IBM Earnings Per Share
Even with the significant revenue declines, IBM was able to maintain earnings around the $12 per share mark. At least until 2019.
To a large extent, this was due to the use of cash for aggressive share buybacks. When investing in the stock market, fewer shares outstanding serve to prop up earnings on a per-share basis.
But falling revenues and accelerating costs for their growth initiatives finally took a toll in 2019. Per-share earnings dropped to less than $11.
These same trends plus the suspension of share buybacks in 2020 and 2021, will further weigh on per-share profits.
But, IBM’s dividends are paid from cash flow. Not accounting earnings. Let’s see if cash flow supports their dividends.
IBM Payout Ratio Based On Cash Flow
Growth issues aside, IBM remains a high margin cash-rich business. Free cash flow covers the dividend with plenty of room to spare.
Chart 3: IBM Dividends And Cash Flow
For 2019, IBM cash dividends consumed only 46% of free cash flow. Thus far in 2020, it appears the dividend payout ratio is just 44% of free cash flow.
For the time being, IBM dividend payments appear to be well covered by cash flow.
And that’s important. As I said, IBM’s high dividends are paid in cash. They are not paid from reported accounting earnings!
IBM Dividend Growth Rate Forecast
For a company going through a tough business transition, like IBM, it’s difficult to make an annual dividend growth forecast. Dividend growth will ultimately depend on revenue, earnings, and cash flow growth. All of which have proven difficult for IBM.
I doubt IBM will return to its days of double-digit percentage annual dividend increases. But, I also don’t believe the small 2020 IBM dividend increase is an indication of the future.
After all, the last IBM dividend increase was announced during a time of peak business uncertainty. As a result of the global health crisis.
So, I’m going to play it right down the middle. For my dividend growth planning purposes, I’m going to use a 5% long-term annual dividend growth rate.
IBM Financial Position
Let’s look at the financial position next as part of our IBM stock analysis and dividend review. It will be the final element I need to conclude on IBM’s dividend safety.
To do this, I like to review financial leverage in the form of debt to equity from the balance sheet. And, the company’s credit ratings. A strong financial position is important when looking for good dividend-paying stocks.
IBM Balance Sheet
IBM carries a large amount of debt. The debt to equity ratio checks in at a relatively high 3.4 to 1.
As a comparison, technology stocks like Microsoft and Apple have a debt to equity ratios closer to 1 to 1. From a debt perspective, IBM is significantly more leveraged than its blue-chip technology company peers.
This metric bears watching. I’d like to see IBM use some of its excess cash flow, after paying dividends, to reduce debt moving forward. So far this year, they have used their excess cash flow to fortify their cash position.
IBM Credit Rating
IBM has an A2 AND A credit rating from Moody’s and S&P, respectively. These ratings represent “investment grade – low credit risk” as shown in the table below.
Table 2: Credit Ratings Support IBM Dividend Safety
This is a very attractive credit rating. Financing the Red Hat acquisition has not caused a serious downgrade.
But, it’s another metric I want to keep an eye on going forward. While IBM works through its business challenges.
IBM Dividend Safety
Is the IBM dividend safe?
Yes. I believe the IBM dividend is safe from a potential reduction for the foreseeable future.
I base my conclusion on several things we have discussed thus far.
First of all, IBM has moderate dividend payout ratios. And plenty of cash flow to continue paying the current dividend rate.
Furthermore, the company’s financial position is strong. As indicated by investment-grade credit ratings.
Finally, IBM has recently achieved the status of a Dividend Aristocrat. I believe management will go to great lengths to maintain this title.
Okay. That concludes the IBM dividend review.
But our IBM stock analysis would not be complete without assessing IBM’s stock valuation. Let’s work through that next.
IBM Stock Valuation
Let’s judge value in several ways:
- IBM dividend discount model
- Morningstar fair value estimate of IBM stock
- Personal Finance investment newsletter buy target
- Price to earnings ratio
- Dogs of the Dow Theory
IBM Stock Dividend Discount Model
I like to use a single-stage dividend discount model. It is also known as the Gordon Growth Model. Gordon’s model considers several factors I have discussed thus far.
- Current dividend payment – $6.52 per share
- Projected dividend growth – 5%
- My desired annual return on investment – 10%
Using these assumptions, the dividend discount model calculates the fair value of IBM stock at $137 per share.
Morningstar Fair Value
The investment analysis firm Morningstar believes IBM is fairly valued at $120 per share.
Personal Finance Investment Newsletter
The longtime investment newsletter Personal Finance places a buy target on IBM stock at $140 per share or less.
IBM Stock Price to Earnings Ratio
The IBM stock price to 2019 earnings sits at about 11 times. This is a modest valuation.
It tells me that investors do not believe in IBM’s growth potential. Otherwise, the collective minds of the market would be placing a higher value on IBM stock.
IBM Stock Dividend & Dogs of the Dow
I won’t get into all of the specifics of the Dogs of the Dow stock-picking strategy. Suffice it to say that under this method, the Dow stocks with the highest dividend yields are deemed to be undervalued and ready for a rally.
And IBM has routinely been one of the highest dividend-paying stocks in the Dow Jones Industrial Average during recent months.
IBM Stock Valuation Summary
We have looked at a number of valuation methodologies that suggest a range of values for IBM stock.
Here is a summary:
- IBM dividend discount model – $137 per share
- Morningstar fair value – $120 per share
- Personal Finance newsletter buy target – $140
- Price to earnings ratio – Priced for little to no growth at 11x
- Dogs of the Dow – Indicates IBM stock is undervalued
This range of valuation measures indicates to me that IBM stock is trading near its fair value. Actually, a bit undervalued, in my opinion.
IBM Stock Analysis & Dividend Review Wrap Up
Let’s wrap up our IBM stock analysis.
Is IBM still a top dividend stock? What other important points have we learned?
Is IBM A Good Dividend Stock?
First of all, the IBM stock dividend is substantial. As a result, IBM has an attractive dividend yield.
Furthermore, IBM’s dividend is well-covered by cash flows. Also, it is supported by a strong financial position.
Finally, in my opinion, the dividend is safe from being reduced. However, IBM’s dividend growth has slowed and will likely remain lower than in the past.
IBM Revenue Trend
IBM’s multi-year struggle to return to consistent revenue growth has not yet ended. Their expensive bet that acquiring Red Hat will help them solve this problem adds financial risk to the situation.
IBM Stock Value
If IBM can return to growth, the stock appears to be an excellent value. In contrast, if growth continues to falter, the stock will likely remain range-bound at or near current levels.
Unlike many of the other dividend stocks I own, IBM has a much greater risk versus reward proposition.
My Path Forward with IBM stock
It’s no secret. IBM has not been one of my big dividend investing successes.
Never the less, I plan to hold my shares. I may consider adding to them below $120 per share. And I will monitor the company’s future growth and debt levels closely.
If I ever feel IBM’s dividends are in jeopardy of being reduced, I hope to exit the stock before too much damage is done. After all, IBM’s dividends are important to me as an investor.
Further Reading About Dividend Investing And Dividend Stocks Like IBM
- A dividend-paying ETF that may meet your objectives
- A beginning investors pursuit of dividends
- A retail pharmacy stock paying out the dividends
My Favorite Dividend Investing & Financial Resources
- Trade stocks for free with the Webull app
- Investment research from Morningstar
- Motley Fool’s stock advisor newsletter
- Dividend stock picks and analysis from Simply Investing
- Manage your total financial picture: Personal Capital
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