The board of International Business Machines Corporation (NYSE:IBM) has announced that it will be increasing its dividend by 0.6% on the 10th of June to $1.68, up from last year’s comparable payment of $1.67. This will take the annual payment to 2.7% of the stock price, which is above what most companies in the industry pay.
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Impressive dividend yields are good, but this doesn’t matter much if the payments can’t be sustained. Before making this announcement, International Business Machines’ dividend was higher than its profits, but the free cash flows quite comfortably covered it. Healthy cash flows are always a positive sign, especially when they quite easily cover the dividend.
Looking forward, earnings per share is forecast to rise by 79.6% over the next year. If the dividend continues along recent trends, we estimate the payout ratio will be 64%, which would make us comfortable with the sustainability of the dividend, despite the levels currently being quite high.
Check out our latest analysis for International Business Machines
The company has been paying a dividend for a long time, and it has been quite stable which gives us confidence in the future dividend potential. The annual payment during the last 10 years was $4.40 in 2015, and the most recent fiscal year payment was $6.68. This means that it has been growing its distributions at 4.3% per annum over that time. Slow and steady dividend growth might not sound that exciting, but dividends have been stable for ten years, which we think makes this a fairly attractive offer.
Investors could be attracted to the stock based on the quality of its payment history. Unfortunately things aren’t as good as they seem. It’s not great to see that International Business Machines’ earnings per share has fallen at approximately 9.9% per year over the past five years. If earnings continue declining, the company may have to make the difficult choice of reducing the dividend or even stopping it completely – the opposite of dividend growth. It’s not all bad news though, as the earnings are predicted to rise over the next 12 months – we would just be a bit cautious until this can turn into a longer term trend.
Overall, we always like to see the dividend being raised, but we don’t think International Business Machines will make a great income stock. The company is generating plenty of cash, but we still think the dividend is a bit high for comfort. We would probably look elsewhere for an income investment.
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