Dividend Hike vs. Buyback: Is IBM Finally Getting It Right?

The long and short of the matter is that buying back stock shrinks the total pot of shares. That does not prevent the float from growing due to acquisitions, stock bonuses and stock options. The difference is that the dividend hike telegraphs to shareholders that the company has confidence in its earnings for years into the future.

IBM said of its dividend hike and its history of dividends:

This is the 20th year in a row that IBM has increased its quarterly cash dividend, and the 12th year in a row of a double-digit percentage increase. IBM has doubled its quarterly dividend over the last five years. With the payment of the June 10 dividend, IBM will have paid consecutive quarterly dividends since 1916.

The new dividend is payable June 10, 2015, to holders of record May 8, 2015. Ginni Rometty, IBM chair, president and CEO said:

Our success in driving growth in our strategic initiatives and our continuous shift to higher value enables us to continue investing in our business, while also returning value to shareholders.

Most analysts have remained cautious on IBM. Credit Suisse has been the most negative with its $125 price target, but maybe even that firm will start to be a bit more positive if IBM is going to use cash to pay shareholders directly with dividends, rather than financially engineering earnings growth. Did IBM stop the bleeding with its most recent earnings report?

ALSO READ: Why This Analyst Still Sees IBM Shares Falling to $125

Now consider what a $1.30 quarterly dividend means. That is an annualized dividend yield of $5.20, and with a $173.50 share price, it generates a dividend yield of 3.0%. Without considering dividend hikes that have not yet taken place, this would move IBM’s dividend yield ranking up to number 11 from number 17 among the Dow Jones Industrial Average dividends.

It is one thing that IBM shares were up 1.6% at $173.50 in midday trading after the dividend hike was announced. It is another issue entirely to consider that this is now the highest stock price since last October.

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