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IBM: Big Blue's Generous Yield

09/10/2019 5:00 am EST

Focus: TECHNOLOGY

Eddy Elfenbein

Editor, Growth Stock Advisor

In a world of crashing interest rates, what’s an investor to do? The good news is that there are some conservative, blue-chip stocks that that still offer generous dividend yields, asserts Eddy Elfenbein, editor of Growth Stock Advisor.

Check out International Business Machines (IBM). Big Blue currently pays out a quarterly dividend of $1.62 per share. That works out to $6.48 on the year which comes to an annualized yield of 4.91%. That’s a nice chunk of change.

Of course, IBM is a stock not a savings account so it does offer some risks. But think of it this way, an investment in IBM is offering you the equivalent of more than 1,200 Dow points, just to buy the shares. Any capital appreciation is extra.

Nor is IBM about to cut the dividend. That’s something investors to watch out for. Sometimes stocks sport high dividends not because they’re a value but because the dividend is about to be cut. The share price reflects the expected dividends, not the past ones.

IBM last increased its dividend just a few months ago. Also, the tech giant can easily cover its dividend commitment.

At the current rate, IBM is paying out about half of its profits to shareholders. In fact, IBM can afford to hike its dividend for years to come. IBM has increased its dividend every year for the last 24 years in a row.

I should note that IBM’s recent earnings report came in 10 cents better than expectations. For Q2, Big Blue earned $3.17 per share while the consensus on Wall Street had been for just $3.07 per share.

Some of IBM’s business has been weak and that’s probably been what’s weighing on the stock. Revenues at IBM have been falling for a few quarters. The important news is that the company is taking action to change things. IBM is exiting lower-margin businesses.

IBM also recently closed on its largest ever acquisition. The company bought Red Hat for $34 billion. IBM’s goal is to become the world’s largest hybrid cloud platform provider. For 2019, ISM expects earnings of $13.90 per share and free cash flow of $12 billion.

The free cash flow number is important. That’s especially true today with so many flimsy companies going public. Overall,  I’m fine with IBM’s 5% yield and $1 billion a month in free cash flow.

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