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IBM Stock - How Safe is IBM's Dividend?

In this video, we perform a deep dive on IBM’s dividend safety. To begin, let’s talk about IBM’s business model. IBM is an information technology company that provides integrated solutions to corporate customers. The company was founded in 1911 and currently operates in five business units: Technology Services & Cloud Platforms, Global Business Services, Systems, Cognitive Solutions, and Financing & Other. IBM is a well-known dividend stock because of its compelling track record of dividend growth. With 18 years of consecutive dividend increases, IBM is a member of the Dividend Achievers, a group of dividend stocks with more than 10 years of rising dividends. You can view our list of Dividend Achievers here: https://www.suredividend.com/dividend... IBM stands out because of its combination of dividend yield and dividend growth. At current prices, IBM trades with a dividend yield of 5.3%, which makes it one of the few stocks in our investment universe with a yield above 5%. You can view our list of high dividend stocks with 5%+ yields here: https://www.suredividend.com/high-div... Looking ahead, IBM’s high dividend yield has led many investors to question the safety of its future dividend payments. For the remainder of this video, we will discuss the company’s current dividend safety from four perspectives: it’s dividend safety in the context of its current earnings, its dividend safety in the context of its current free cash flow, its dividend safety in the context of its recession performance, and its dividend safety in the context of its current debt load. IBM’s Dividend Safety Relative to Earnings First, let’s discuss IBM’s dividend safety in the context of the company’s current earnings. When IBM reported third quarter financial results on October 16th, the company reaffirmed its financial guidance for the full year of fiscal 2018. IBM continues to expect adjusted earnings-per-share of at least $13.80 for the full fiscal year. For context, IBM currently pays a quarterly dividend of $1.57 per share, which implies a payout ratio of just 45%. Using earnings, IBM’s dividend is very safe for the foreseeable future. IBM’s Dividend Safety Relative to Free Cash Flow Many analysts believe that comparing a company’s dividend payments to its free cash flow is a better method for assessing dividend safety. Accordingly, we will now compare IBM’s current dividend payment to its free cash flow. Through the first nine months of fiscal 2018, IBM generated $5.4 billion in free cash flow and spent $4.2 billion on dividend payments. This is equivalent to a free cash flow dividend payout ratio of 78% Using free cash flow, our conclusion is the same. IBM’s dividend appears safe for the foreseeable future. IBM’s Dividend Safety Relative to Recession Performance Companies do not cut their dividends in the good times. Instead, dividends are reduced when companies experience financial difficulties. Accordingly, this section will analyze IBM’s current dividend safety in the context of the company’s historical recession performance. We believe that the best way to measure a company’s recession resiliency is by measuring its earnings-per-share performance during the financial crisis that occurred between 2007 and 2009. IBM’s earnings increased each year of the last economic recession. Accordingly, we have no concerns about the company’s ability to pay rising dividends moving forward. IBM’s Dividend Safety Relative to Its Current Debt Load The last angle that we will use to assess IBM’s current dividend safety is by looking at the company’s current debt level. More specifically, we will see how much the company’s weighted average interest rate will need to increase before the company’s adjusted net income will no longer cover its dividend payment. At the end of fiscal 2017, IBM had $46.8 billion of debt outstanding. The company generated $1,273 million of interest expense during the same time period for a weighted average interest expense of 2.7%. The following image shows how changes to IBM’s weighted average interest rate would impact the company’s dividend coverage, as measured by free cash flow. As the image shows, IBM’s weighted average interest rate would need to rise to approximately the 20% level before its dividend would no longer be covered by free cash flow. Accordingly, we believe that IBM’s debt level is unlikely to impact the safety of its dividend moving forward. Conclusion Thank you for watching today’s video, which performed a deep dive on IBM’s current dividend safety. We invite you to subscribe to this channel and like this video, which will help more people discover Sure Dividend’s investor education efforts. If you’re interested in learning more about our systematic approach to dividend growth investing, visit our website at www.suredividend.com.