IBM Dividend Safety Analysis

The chart below from  StockRover* shows the dividend and growth rate since 2007 superimposed over the stock price chart (in gray). The growth in the regular cash dividend has been approximately 8.1% in the past decade, 3.2% in the trailing 5-years, and 1.5% in the past 3-years. Dividend growth has been slowing as revenue has declined and the payout ratio has risen.

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Source: StockRover*

The forward dividend is currently $6.56 per share giving a forward dividend yield of about 4.7%. The dividend yield history for IBM is seen in the chart below. The average 5-year dividend yield is about 4.45%. The current dividend yield is higher than the trailing 5-year average. This suggests that IBM is undervalued base on dividend yield. The chart below indicates that the dividend yield has been roughly 4.5% or more since mid-2018 with a few periodic dips below that level. IBM is paying a dividend yield that an investor mostly finds in utility stocks and REITs making the stock very attractive.

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Source: Portfolio Insight

IBM’s Dividend Safety

I like to take a look at three dividend safety metrics: earnings, cash flow, and debt. It is important to me as a dividend growth investor for all three to meet my criteria. Granted, there can be short-term fluctuations that results in a stock not meeting my criteria. But those are usually transient and not long term. Let’s do a deep dive into IBM’s dividend safety.

Earnings Perspective

IBM’s dividend is covered by adjusted diluted earnings in most years but 2020 was not a typical year. In 2020, IBM earned $8.67 per share but earnings were impacted by pre-tax charges. The company paid a dividend of $6.51 per share giving a payout ratio of about 75%. This value is high and above my threshold of 65%. The COVID-19 pandemic also affected revenue and earnings in 2020. But 2019 was a more typical year. IBM’s diluted adjusted earnings per share was $12.81. The company paid a dividend of $6.43 per share giving a payout ratio of 50%, an excellent value. In 2021, IBM’s consensus earnings per share is $10.93 in 2021. The dividend is $6.56 per share giving a payout ratio of 60%. This is below my criterion value.

That said, dividend coverage is worse after accounting for unusual items, but these vary year-to-year. IBM typically takes charges for mergers and restructuring and often has gains on sales of investments and assets.  For example, in 2020, diluted GAAP earnings per share was $6.13 per share. This means that the dividend was not covered by earnings in 2020. However, the dividend has been covered by diluted earnings in most years in the past decade with the exception of 2017 and 2020, as seen in the chart below from TIKR*.

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Disclaimer: Dividend Power is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with ...

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