Friday, December 9, 2011

International Business Machines (IBM) Dividend Stock Analysis

International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. This dividend achiever has paid uninterrupted dividends on its common stock since 1913 and increased payments to common shareholders every year for 16 consecutive years. Most recently, billionaire investor Warren Buffett made public his 5% stake in IBM, along with his stakes in several new companies.

The most recent dividend increase was in May 2011, when the Board of Directors approved a 15.40% increase in the quarterly dividend to 75 cents/share. IBM’s largest competitors include Infosys (INFY), Wipro (WIT) and Accenture (ACN).

Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.

The company has managed to deliver a 11.60% annual increase in EPS since 2001. Analysts expect IBM to earn $13.36 per share in 2011 and $14.79 per share in 2012. In comparison IBM earned $11.52 /share in 2010. IBM has publicly announced its goal to hit $20 in earnings per share by 2015. The company is one of the most consistent repurchasers of stock, having reduced the total shares outstanding by 50% since 1995.

IBM has transformed itself from a hardware company to services, solutions and software conglomerate. The company’ expansion overseas, focus on high margin software and providing solutions to customers, investing in innovation should help it in achieving its goals. The company faces some pricing pressure from competitors, and risks related to failure to transition new products successfully. However, given the company’s economies of scale, contiguous focus on building and maintaining strong client relations and drive to innovate, it should weather any near term weaknesses successfully.

The company’s Return on Equty has doubled over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 18.30% per year since 2001, which is higher than the growth in EPS. I would expect IBM to keep increasing in dividends at 10% per year at least for the foreseeable future.

An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1993 we see that IBM has actually managed to double its dividend every four and a half years on average. The company did cut distributions by 80% in 1993. If the company diverts the money it uses for share buybacks, its dividend payment could have easily topped $14/share in 2010.

The dividend payout ratio has remained low below 25% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently IBM is cheap at 15.30 times earnings, has a sustainable dividend payout but yields a paltry 1.60%. I would keep IBM on my radar, and would consider it for inclusion in my dividend growth portfolio on dips below $120/share, which is the equivalent of a 2.50% yield at current dividend rates.

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  1. Isn't the point of a dividend growth portfolio to not worry so much about the fluctuations in stock and think about long-tern dividend yield on cost?

    If that is the case, it seems crazy to wait / hope that IBM falls to 120ish a share, rather than buy in now and have a yield on cost of 2.5% within a couple of years that will only continue to increase.

    I get that 2.5% is your generic entry criteria but so of your other rules seem to be not hard stops (like Visa and their lack of raising history, and has a <1% yield) why does the 2.5% have to be?

  2. Dividend Investing is not a black and white process. There are nuances to it.

    These nuances might cause me to prefer a stock like Visa, even if it doesn't have 10 years of dividend increases and a high yield, over a stock like IBM which has 10+ years of increases but a low current yield.

  3. IBM has been the best example of showing the importance of timing in Business. When they declare to move from manufacturing to services.

  4. IBM is accelerating its earnings and cash flows generating $29.5 billion in revenues in the fourth quarter 2011. Gross margin stands at 50% and it generated $19.9 billion in Cash from operating activities in that quarter. From these cash inflows, the company spent $4.1 billion in CAPEX and paid dividends of $3.5 billion as well as bought back stock worth $15 billion. This tells me the company has a lot of room to raise its dividend while accelerating earnings in 2012. IBM has returned an annualized total return of 7.5% in the last 10 years and has grown its dividend from $0.15 per share to $0.75 per share paid quarterly. Source: Current dividend yield is 1.6% and market capitalization of $225 billion.


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