Last update on 2024-06-25

International Business Machines (IBM) - Dividend Analysis (Final Score: 8/8)

Comprehensive dividend analysis of International Business Machines (IBM) with an 8/8 scoring, highlighting performance, stability, and trend insights for the discerning investor.

Short Analysis - Dividend Score: 8

We're running International Business Machines (IBM) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The dividend analysis of IBM shows it holds up favorably in terms of its yield, with consistency in returning value through dividends and stock repurchases. However, there are concerns regarding dividend coverage by earnings and cash flow especially in recent years. IBM's history of paying dividends for over 25 years, coupled with a stable increase in dividends for the past two decades, offers reliability for income investors. Posting lower-than-ideal average growth rates and some years with very high payout ratios can signal some red flags nonetheless.

Insights for Value Investors Seeking Stable Income

Considering IBM’s well-established history in paying dividends and steady increase in dividend payouts, it could be an attractive option for income-focused investors. Nevertheless, due to some inconsistencies in earnings and recent high payout ratios, potential investors should closely monitor these areas for future stability. It's worth exploring further if you're looking for a stable income stock but proceed with some caution.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Explain the criterion for International Business Machines (IBM) and why it is important to consider

IBM's current dividend yield of 4.0538% significantly surpasses the industry average of 1.12%. Historically, IBM's dividend yield has shown an upward trend since 2003 when it was 0.6798%. This reflects a strong commitment to returning value to shareholders, as evidenced by the steady increase in dividends per share, peaking at $6.63 in 2023 compared to $0.6023 in 2003. The stock price closed at $163.55 in 2023, up from $88.6 in 2003. While IBM's dividend yield is attractive, indicating potentially higher income for investors compared to its peers, this trend may also reflect stagnation in stock price performance. For context, the industry average dividend yield fluctuated, with peaks such as 3.61% in 2008, but has largely remained low, thus making IBM an attractive option for income-focused investors.

Average annual Growth Rate higher than 5% in the last 20 years?

Dividend growth rate above 5% is a strong indicator of a company's financial health, showing its ability to increase cash flow returns to shareholders consistently over an extended period.

IBM's dividend per share ratio fluctuates significantly over the last 20 years, showing substantial spikes and drops. For instance, the ratio is 6.77 in 2003, then jumps to 41.02 in 2006, and eventually plummets to 0.607 in 2023. The average dividend ratio of 12.9027 is relatively low, suggesting inconsistency rather than steady growth. Consequently, IBM's dividend growth rate fails to maintain a stable trend above 5%, signifying a less reliable income stream for investors.

Average annual Payout Ratio lower than 65% in the last 20 years?

Average Payout Ratio lower than 65% in the last 20 years

The average payout ratio over the last 20 years stands at 55.90%. This is below the 65% threshold, which is generally considered healthy as it implies that the company retains enough earnings to reinvest or cover unexpected costs. Although 2020, 2021, and 2022 saw exceptionally high payout ratios, including a staggering 362.73% in 2022, these anomalies do not offset the long-term average significantly. However, concerning these extreme values, investors should investigate what caused such high payout ratios, particularly because a ratio above 100% means the company is paying out more in dividends than it earned in net income, which is unsustainable over the long term. Overall, the trend is good for the said criterion, but the deviations in recent years should be analyzed further.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings in a company.

Earnings per Share (EPS) shows the net income that is earned on a per-share basis, which is crucial to compare directly to dividends paid per share. This ensures that the company can sustain its dividend payouts without compromising its financial stability. For IBM, the EPS data indicates fluctuations across the given years, peaking at $14.9438 in 2013 and plummeting to $1.8168 in 2022 before a slight recovery to $8.233 in 2023. The dividend per share data, on the other hand, shows a steadily increasing trend from $0.6023 in 2003 to $6.63 in 2023, indicating IBM's commitment to return value to shareholders despite earnings variations. The coverage ratio has largely varied, demonstrating robust coverage in earlier years. However, recent years (especially 2021 and 2022) reveal a concerning trend, with a drastic drop in EPS not sufficiently covering dividends, as evidenced by the negative coverage ratio in 2022. Although IBM's efforts to recover are reflected in the 2023 EPS, sustainability concerns call for caution going forward.

Dividends Well Covered by Cash Flow?

Dividend coverage by cash flow assesses the sustainability of dividend payments. It's crucial as it ensures the company generates enough cash to support dividends without compromising its financial health.

Analysis of IBM's dividend coverage ratio from 2003 to 2023 reveals some noteworthy trends. In the early 2000s, the company's free cash flow comfortably exceeded its dividend payout amount, with coverage ratios starting around 0.108 in 2003. However, over the next several years, the ratio has shown an increasing pattern. In 2013, the ratio was 0.304, escalating further to 0.502 in 2018. Unfortunately, more recent years have shown even higher ratios, with a dramatic rise to 0.702 in 2022. The trend is concerning as it indicates that IBM is paying out a larger portion of its cash flow as dividends. By 2023, the coverage ratio stands at 0.498, a clear indicator that IBM's dividends are eating into its free cash flow more substantially than in the past. While the coverage ratio below 1 means dividends are still covered by free cash flow, the internal stress within IBM's finances appears elevated when comparing it to historical figures. Such a heightened payout ratio may hinder IBM's ability to reinvest in business operations or weather economic downturns. Therefore, this trend should be considered indicative of potential risk and may not be favorable in the long term if the ratio continues at this elevated level.

Stable Dividends Since the Company Began Paying Dividends?

Discussing the pattern of stability in dividends over the past two decades is crucial for income-seeking investors. Assessing if the dividend per share has decreased by more than 20% in any year is crucial.

The dividend payments of IBM over the past 20 years exhibit strong stability. An increment is visible every year without fail; from $0.6023 in 2003 to $6.63 in 2023 showcases an unbroken upward trend. This consistency highlights IBM’s commitment to returning value to shareholders. Moreover, the constant yearly growth can entice income investors who prioritize stable and predictable cash flows from dividends, thus presenting a very favorable trend on this criterion. Conclusively, the absence of a 20% dip in any year further establishes IBM’s reliability in dividend payouts, reflecting robust financial health.

Dividends Paid for Over 25 Years?

Assessing whether a company has paid dividends for over 25 years is critical for understanding its commitment to returning value to shareholders and its financial stability.

IBM has shown an impressive track record of paying dividends for over 25 years, with the dividends per share growing steadily from $0.4111 in 1998 to $6.63 in 2023. This consistent and increasing trend indicates a strong and stable financial performance over the years. Moreover, companies that can maintain dividend payments over such long periods tend to have predictable and stable cash flow, enhancing their appeal to dividend-seeking investors. Given IBM's historical dividend trend and the ability to increase dividends over time, it positions itself favorably in terms of investor confidence and long-term financial health. This trend is decidedly positive and signals that IBM values returning capital to its shareholders while maintaining financial robustness.

Reliable Stock Repurchases Over the Past 20 Years?

The frequency and reliability of stock repurchases over an extended period indicate a company's commitment to returning value to its shareholders. It also reflects the management’s confidence in the company's future performance.

International Business Machines (IBM) has demonstrated a comprehensive strategy of reliable stock repurchases over the past 20 years. With data showing a consistent reduction in the number of shares from 1,756,090,689 in 2003 to 911,210,319 in 2023, it highlights a significant buyback trend. This reduction in shares implies that IBM has continually acted to repurchase shares, thus returning capital to investors and likely enhancing per-share metrics such as Earnings Per Share (EPS). The most active buyback years observed from 2004 to 2019 further support this, showcasing regular repurchasing efforts. Importantly, the noted average repurchase rate of -3.1961% annually stresses a strong downward trend in shares outstanding over 20 years. However, it’s worth noting that in recent years (2020-2023), there’s a small increase in shares, hinting at potential issuance or a reduction in repurchasing activities possibly due to broader strategic adjustments or economic impacts such as the COVID-19 pandemic. Overall, the long-term trend appears robustly positive for subsequent shareholder value generation.