Technology

IBM Dividend Hike Should Make It a Dividend Aristocrat

Jon C. Ogg

Published: April 28, 2020 11:22 am

If there is one company that could use some good news in the technology sector, International Business Machines Corp. (NYSE: IBM) comes to mind. While IBM’s legacy IT services business has been pressured, and while IBM is focused on generating growth from the cloud and strategic imperatives, the one thing that the company can claim is that it has been true to its dividend. That dividend may be what is keeping very restless shareholders in the story.

IBM announced on Tuesday that it was raising its regular quarterly cash dividend to $1.63 per common share. This may only represent a one-cent per share hike from a year ago, but what stood out is that IBM also said this was the 25th consecutive year that IBM has raised its dividend payout.

IBM also indicated that it has consecutive quarterly dividends since 1916, but the 25-year hike streak will now make IBM a Dividend Aristocrat at a time when so many dividends that were considered to be “golden” are suddenly considered “at risk” due to the sudden recession on the back of the COVID-19 pandemic.

As for the new dividend yield, that will generate nearly a 5.2% payout. IBM still is considered by many investors to be a value stock rather than a growth stock, but some have also referred to IBM as a value trap.

IBM’s dividend yield is handily higher than most Dow Jones industrial stocks and is also handily higher than the median 2.6% dividend yield of the 403 dividend-paying stocks within the S&P 500. Note that the 10-year Treasury yield of 0.62% and the 30-year Treasury yield of 1.22% do not even register in comparison.

IBM has received only a “cautiously positive view” from Wall Street, with most of the positive views still trying to look long term, now that IBM finally has a new CEO. Firms such as Wedbush Securities, Wells Fargo, Stifel and others lowered their price targets on IBM after earnings. While the initial reaction to IBM’s earnings was disappointing, its shares have risen since that earnings reaction.

IBM is covering its dividend from operations and it still has a large cash pile, but the tech giant did join most other large companies in withdrawing its 2020 financial guidance due to uncertainty around the COVID-19 recession. Big Blue generated net cash from operating activities of $4.5 billion in the first quarter, which the company further characterized as $2.1 billion, excluding Global Financing receivables.

IBM’s free cash flow was also $1.4 billion, and it said with earnings that the company had returned $1.4 billion to shareholders via dividend payments last quarter.

As for the balance sheet, IBM’s quarter-end cash and cash equivalents came to $12.0 billion. The company’s total debt, which includes Global Financing debt of $22.3 billion, was $64.3 billion. That may sound high, but IBM acquired Red Hat, and the company noted in its recent earnings release that its debt load was actually down by $8.7 billion since the end of the second quarter of 2019.

With IBM’s stock up 0.6% at $126.70 on Tuesday morning, its stock price is actually up 40% from the panic-selling low of $90.56 back on March 23. The shares also are still down 20% from their 52-week high of $158.75.

Arvind Krishna, IBM chief executive officer, said:

IBM’s free cash flow and our strong balance sheet gives us confidence to both invest aggressively in cloud and AI technologies, while also returning value to our shareholders. We remain fully committed to our dividend even during this unprecedented time, and we recognize the importance of the dividend to the more than 2.3 million investors in IBM.

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