Key Points
Last week was a rough one for International Business Machines (NYSE: IBM) as the company’s preannounced results rattled the stock, and that’s putting it lightly. Shares cratered, and fears mounted about the business’s future, as IBM noted a shift in demand away from its products and services. Not only did the company fall short of expectations in the most recent quarter, but it also raised alarm bells about its future growth.
For dividend investors, it may also raise concerns about its payout. Is IBM’s dividend, which now yields 3.2%, still safe?
How concerned should IBM investors be about the stock’s dividend?
When a company’s earnings come in lower than expected, and it’s also facing some troubling headwinds, that may spell trouble for its dividend. Since a dividend is discretionary and not guaranteed, management could cut or, in extreme cases, suspend it if it’s no longer financially viable to continue paying it.
For the second quarter, IBM announced that its adjusted earnings per share (EPS) totaled $2.93, which was lower than the $3.02 analysts had expected. It’s a miss, but that alone doesn’t necessarily mean the payout is in trouble. IBM’s quarterly dividend is $1.69, which is well below those EPS figures.
Its payout ratio, based on unadjusted figures, is up around 60% over the most recent four quarters. The company’s free cash flow has also totaled $12.3 billion during that stretch, which is nearly double what it has paid out in dividends over the past 12 months ($6.3 billion). Even if its earnings are a bit worse than expected, IBM’s dividend should remain in fine shape. The tech company also recently increased it by one cent, which is a good sign of confidence that not only can the payout be sustainable, but that it is also viable to increase it. In five years, the company has boosted its dividend by a modest 3%.
Is IBM a good dividend stock to buy right now?
IBM’s recent sell-off has pushed its yield higher, enabling investors to lock in a yield above its usual level. Thus, there’s an incentive to buy now. While the stock may fall further after the full results come out, it may also rally if the sell-off proves a bit extreme.
For long-term dividend investors, IBM’s stock may be worth buying despite the uncertainty, as it offers a fairly high yield (the S&P 500 average is only 1.1%) while also giving investors exposure to growth opportunities in the tech sector. It can be a good buy for the long haul, but volatility may persist in the short term.
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends International Business Machines. The Motley Fool has a disclosure policy.
