IBM Joins the Dividend Aristocrats

07/07/2020 5:00 am EST

Focus: TECHNOLOGY

Prakash Kolli

Founder and Author, Dividend Power

International Business Machines (IBM) recently raised the regular quarterly cash dividend albeit only by 0.6%. But still, this represented the 25th consecutive year of increases which is the requirement to be a Dividend Arisocrat, observes Prakash Kolli, editor of Dividend Power.

Notably, there are only 66 Dividend Aristocrats at the moment, which places IBM in a select crowd. Further, IBM is yielding over 5%. It is one of the few stocks with a yield this high but still decent dividend safety metrics.

IBM is a global information technology company that provides integrated enterprise solutions for software, hardware, and services. IBM’s focus is large, multi-national customers and governments, for which it runs mission critical systems. In the services business, IBM is the world’s largest IT provider.

IBM top line struggles are well documented. Revenue is down from approximately $105 billion in 2011 to $76 billion in 2019. The company has exited several business lines including PCs and semiconductor chips in the past several years.

But arguably the main issue from IBM is that the nature of IT is changing. Enterprise customers are moving to cloud-based architectures to lower costs. IBM is arguably behind the three market leaders which are AWS by Amazon (AMZN), Azure by Microsoft (MSFT), and Google (GOOG).

IBM is in the middle of a transformation. The former CEO bought RedHat for $34 billion to accelerate efforts in making IBM a major player in enterprise hybrid cloud. Hybrid cloud is computing and storage infrastructure that is arranged in a configuration of private cloud and public cloud.

IBM also has a new CEO who previously ran IBM’s cloud and cognitive services business. Additionally, IBM has a new President, who was the former CEO of RedHat.

COVID-19 will provide some headwinds to earnings and cash flow in 2020 and possibly into 2021. This may put some pressure on the dividend in 2020. But as global economies reopen then sales, earnings, and cash flow should recover.

At the current stock price IBM trades at a forward price-to-earnings ratio of about 10.5. This is slightly below the trailing 10-year multiple of about 12X. I view IBM as a long-term buy for those seeking income and dividend growth due to the combination of yield and entrance into the Dividend Aristocrat club.

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