IBM Dividend Safety Analysis

International Business Machines (IBM) is in the news recently since James Whitehurst, the current President of IBM and former CEO of RedHat is leaving the company. The stock dropped about (-5%) in response to the announcement. I last examined IBM’s dividend safety in August 2020. Since then, much has changed for IBM including traction for hybrid cloud, and the impending spinoff of Kyndryl, the Managed Infrastructure Services business unit. I am generally optimistic about IBM and even included the company as one of my Top 3 Dividend Growth Stocks for 2021. IBM started as one of the Dogs of the Dow in 2021 with a dividend yield over 5%. However, declining revenue and the spinoff will impact dividend safety. Hence, it is a good time to take a look again at IBM’s dividend safety.

IBM Dividend Safety

Overview of IBM

IBM traces its history back to 1911 when it was founded. Today, IBM is a global information technology company that provides integrated enterprise solutions for software, hardware and services. IBM’s focus is running mission-critical systems for large, multi-national customers and governments. IBM typically provides end-to-end solutions. In the services business, IBM is the world’s largest IT provider with 5.5% market share. In software, IBM’s software business is mostly middleware, which is the software layer that connects applications and devices to each other. In hardware, IBM sells the z15 mainframes, storage, and the Power-based servers. 

The company has five business segments: Cloud & Cognitive Software (32% of total revenue), Global Business Services (22% of total revenue), Global Technology Services (35% of total revenue), Systems (9.5% of total revenue), and Global Financing (1.5% of total revenue). IBM generated annual revenue of about $73,621 million in 2020 and $73,779 million in the LTM.

Since the new CEO took over, IBM has refocused its business on a hybrid cloud and AI strategy. The IT giant has leveraged its acquisition of RedHat to transform its business. IBM is divesting the Managed Infrastructure Services business with about $19 billion in revenue. The spinoff of Kyndryl should be complete by end of 2021.

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Source: IBM Q1 2021 Presentation

IBM Dividend and Growth

IBM is a long-time dividend payer and also a dividend growth stock. The company is one of the few that has paid a dividend consistently for 100+ years. IBM started this streak in 1916. IBM is also a Dividend Aristocrat with 26 years of consecutive annual dividend growth. 

IBM’s dividend yield has consistently been about 4.5% or more for about three years. IBM’s current dividend yield of roughly 4.7% is elevated compared to that of the S&P 500, which his yield of about 1.3% at the moment. Despite some COVID-19 pandemic related pressures on revenue and the long-term decline in the top line, IBM has not cut or suspended the dividend. This is a testament historical dividend safety and the company’s commitment on paying a dividend. Granted, IBM’s dividend safety has weakened due to long-term revenue declines and rising debt, more on that below.

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