IBM Dividend Safety Analysis

IBM Dividend Safety - Earnings


Cash Flow Perspective

The dividend is significantly better covered by free cash flow. On a trailing basis, operating cash flow was $18,197 million in 2020 based on data from TIKR*. Capital expenditures were $2,618 million giving free cash flow of $15,579 million. The dividend required $5,797 million in 2020 giving a dividend-to-FCF ratio of about 37%. This is well below my requirement of 70%.

On a forward basis, the dividend requires about $5,864 million ($6.56 x 894 million shares). Assuming a similar FCF in 2021 as an estimate, the dividend-to-FCF ratio is about 38%, which is still a very conservative value. 

The cash flow required to pay the dividend increased from $3,473 million in 2011 to $5,797 million in 2020 and about $5,864 million in 2021. The growth rate has slowed as IBM has stopped issuing shares in 2015 and the dividend per share growth rate has slowed. It is unlikely that IBM will increase the dividend per share by more than low-to-mid single-digit percentages over the next few years. Instead, IBM is focused on reducing its debt and seemingly bolt-on acquisitions to reinforce its hybrid cloud and AI strategy.

Debt Perspective

One challenge for IBM is its debt. IBM divides total debt into core debt and global financing debt. IBM’s total debt has risen in the past decade and most recently spiked for the RedHat acquisition. Since then, total debt has declined to about $61.1 billion at end of 2020. Total debt has declined even further since Q1 2021 to $56.4 billion.

IBM Dividend Safety - Total Debt

Source: Portfolio Insight

Global financing debt is debt that IBM uses to finance sales to customers and also for OEM commercial financing to suppliers, distributors, and resellers of IBM products. Global finance debt is about $18.3 billion at end of Q1 2021. 

This dollar amount is decreasing each year as IBM started winding down OEM commercial financing in 2019. This has the benefit of reducing total debt needs and reducing risk of financing non-investment grade customers (~39% of total). That being said, very little of this debt is past due of 90 days or more and the default rate is very low. IBM has seemingly been prudent in managing this type of debt.


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Source: IBM 2020 Annual Report

Core debt is operational debt for running the company and acquisitions. Core debt rose for the RedHat acquisition but since then IBM has aggressively deleveraged and paid down approximately $16.6 billion in debt. Core debt is now about $38.3 billion offset by $11.1 billion in cash, equivalents, and marketable securities at the end of Q1 2021.

On a total debt basis, IBM’s leverage ratio reached 4.65X at the end of Q1 2020 at the time of the RedHat acquisition. This has come down to about 3.04X at end of 2020 and 2.8X in the LTM. If we look only at core debt, the leverage ratio is 1.7X in the LTM. I expect the leverage ratio to come further down as the company continues to pay debt according to its maturity cycle and not add new debt. Similarly, interest coverage went as low as 2.81X by end of Q1 2020. This has come risen to about 6.7X at end of 2020 and 7.3X in the LTM.

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