International Business Machines Corporation (IBM) provides information technology (IT) products and services worldwide. IBM has rewarded its shareholders with double-digits dividend increases each year over the past decade, including an announcement earlier this year that it would be increasing its dividend by 12%.
However, this has not always translated into a consistent rise in the stock price. In fact, the stock is down this year despite the overall market being up almost 25%.
IBM data by YCharts
Included below are the dividends and growth rates for the past decade, along with IBM's payout ratio:
|Year||Dividend||Dividend Growth||Payout Ratio|
IBM has increased its dividend every year for the past 18-years, even throughout the financial crisis. Furthermore, the compounded annual growth rate of the dividend was almost 20% over the past decade (2003-2013). So clearly IBM has been a consistent dividend growth stock for years.
Interestingly, IBM has managed to deliver this dividend growth while maintaining a relatively low payout ratio that is still under 25%. While this does represent a significant increase from ten years ago, it is still relatively conservative, and provides some assurance about the safety of the dividend, as well as room for continued dividend growth even during periods of limited earnings growth.
Dividend Discount Model
Using the dividend discount model, I determined the value of the company based on its future dividend payments. In performing this valuation, I made several assumptions:
- First, I used 8% as my discount rate, based on the long-term average return of the stock market
- Next, I used IBM's estimated FY13 dividend as the base to apply future growth rates to, and assumed its most recently announced dividend ($0.95) will be paid in December
- I applied a 13% growth rate for 2014-2016, a 12% growth rate for 2017 & 2018, an 11% growth rate for 2019-2021, and a 10% growth rate for 2022 & 2023
- Finally, I assumed a 4% perpetuity rate after 2023
Based on these assumptions, I calculated that IBM's intrinsic value is ~$179 per share. At the current price of $182 per share, the stock seems to be fairly valued, however, it offers very little margin for error.
In addition, my assumptions are somewhat aggressive, such as a 13% growth rate for the next few years, and a perpetuity rate of 4%. So investors should pay close attention to their growth assumption and make adjustments based on their own outlook.
Overall though, historical performance seems to indicate that IBM is a consistent dividend paying stock, that rewards its shareholders with very strong growth in its dividend as well. Therefore, long-term, income-oriented investors may want to give IBM a closer look to see if it should be included in their portfolio.