IBM Corp. (IBM) raises dividend 7% & remains a very cheap technology stock

IBM’s (NYSE:IBM) dividend was increased by 7%.  Its overall yield is 3.78%. The firm started paying a dividend in 1913.

International Business Machines Corporation provides information technology services and makes hardware products on a worldwide basis. The firm’s products span a wide range of hardware, services, and now software. IBM operates in over 175 countries. More than half of all revenue comes from overseas.  IBM was formerly known as Computing-Tabulating-Recording Co. and founded in 1910. It has been known in its current form since 1924. The company headquartered in Armonk, New York.

IBM has maintained a three-year growth rate of dividends of 11.5 percent. IBM currently ranks 1st in dividend yield within the large cap technology,  diversified computer systems category. The quarterly dividend for the June payment will be $1.5 versus the prior year rate of $1.4 per share. IBM is a member of our Top 100 Dividend Stocks.  (see below).

top-100

The dividend will be paid at the new higher rate on June 10, 2017, to shareholders of record at close of business on May 10, 2017. IBM Corp. is currently priced at $153.98. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
5/10/2017 1.5
2/8/2017 1.4
11/8/2016 1.4
8/8/2016 1.4
5/6/2016 1.4
2/8/2016 1.3
11/6/2015 1.3
8/6/2015 1.3
5/6/2015 1.3
2/6/2015 1.1
11/6/2014 1.1
8/6/2014 1.1
5/7/2014 1.1
2/6/2014 0.95
11/6/2013 0.95
8/7/2013 0.95
5/8/2013 0.95
2/6/2013 0.85
11/7/2012 0.85
8/8/2012 0.85
5/8/2012 0.85
2/8/2012 0.75
11/8/2011 0.75
8/8/2011 0.75
5/6/2011 0.75
2/8/2011 0.65
11/8/2010 0.65
8/6/2010 0.65
5/6/2010 0.65
2/8/2010 0.55

Analysis of IBM is based upon our five key criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 3.78% 105
Dividend Growth (3-7 year avg) 12.3 252
Forward P/E 11.36 52
S&P Financial Rating AA- 224
Beta 0.90 163
Total Score 796
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2017 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
3.78% 11.5 13 84.85 1.89 1.1 2.0 1.45% 4.24%

Positives;

  • IBM maintains an investment grade rating of AA-.
  • IBM’s current dividend yield (3.78%) is above its five-year average historical dividend yield.
  • IBM maintains a beta of 0.90, lower than the average company.
  • IBM’s dividend yield is above that of the S&P 500 Index.
  • IBM has paid out a dividend consecutively for the past 104 years.

Negatives;

  • IBM is trading above its ten-year average price/sales (P/S) ratio.
  • IBM’s earnings per share growth have been generated primarily through stock buybacks.

Latest Earnings & Overall Analysis:

IBM issued its earnings data on April 18th. The company reported $2.38 EPS for the quarter, topping the consensus estimate by 4 cents.  IBM had very solid results from the cloud business, however revenues continued to decline – for the fifth straight year. Revenue came in at $18.1 billion compared to the consensus estimate of $18.3 billion. It resulted in a 1 percent increase in EPS, or earnings per share.  Revenue declined by 3 percent from last year’s numbers. As for guidance, the firm initiated a 2017 EPS expectation of $13.80 per share.  This was slightly above estimates.

 

The firm is in the middle of a major transformation from hardware and software to cloud computing. It also is now heavily focusing on artificial intelligence.  The firm still has a long way to go. It must first stop the revenue decline.  The firm has not posted positive revenue since the first quarter of 2012.  The firm hopes it largess research and development budget will pay off as well. IBM spent $1.5 billion in the last three months on R&D.  The hopes that cloud and AI revenue can finally offset its maturing sales in enterprise technology.

 

IBM’s Watson has done well and continued to gain market share in the quarter. The AI portion of IBM is moving into pharmaceutical research and also has announced new partnerships with Lyft and Samsung.   The cognitive solutions sales increased to just over $4 billion.  IBM’s immense business in its core legacy business gives the firm time to continue to develop cloud, AI, and new partnerships.  This will give dividend investors confidence that cash flow is secure and that the firm can continue to reward shareholders.
Overall the firm is a solid holding within the technology sector, despite its poor revenue growth outlook. Its large $100 billion-plus service business creates steady profits and its customer base is very loyal.  The firm can slowly migrate many of these customers from hardware to other profitable solutions. The firm returned $2.6 billion to shareholders through dividends and share repurchases in the first quarter as well.
2016 2015 2014 2013 2012
Earnings per Share 12.39 13.6 15.59 14.94 14.37
Annual Dividend 5.5 5 4.25 3.7 3.3
Payout Ratio 44.39% 36.76% 27.26% 24.77% 22.96%

Overall, the firm maintains a stellar credit rating and low beta. Its dividend yield is above average and it trades at under 12 times next year’s earnings expectations.

Earnings per Share 2017 (projected) 11.95
Dividend 5.9
Payout Ratio 49.37%

Based on the firm’s financial credit rating, elevated dividend yield and low beta, IBM Corp. qualifies as one of our Top 100 Dividend Stocks

IBM Corp. Dividend Yield Chart (Click to enlarge)

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

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