IBM And Dividend Growth

Jun. 7.12 | About: International Business (IBM)

In two previous articles, we saw how two technology giants Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) are well on their way to being good dividend growth holdings. This article takes a look at one more technology giant, International Business Machines Corporation (NYSE:IBM) and compares its dividend growth rate with Intel's and Microsoft's.

Assuming everyone knows about this behemoth well enough, let us take a look at its dividend basics:

  • IBM has been paying dividends since time immemorial literally, dating back to 1913 according to its investors relations webpage.
  • The average dividend growth over the past 5 years has been 16%.
  • The current payout ratio sits at a comfortable 25%, giving IBM lots of room to keep up the dividend growth rate well into the future.

As in earlier exercises, let us see the power of dividend growth for an investor who can set aside his/her money in IBM for 10 years. Assume you purchase 100 shares at the recent price level of $190 for a total initial investment of $19,000. The current yield works out to just below 2% as shown in the table below

Even though the dividend growth rate over the past 5 years has been 16%, let us assume a conservative 10% dividend growth rate. While not many companies have managed this rate in the past, to make the comparison fair between Intel, Microsoft and IBM we will have to assume a proportionately adjusted rate.

Notice how the dividend payments and the yield on original cost more than double in 10 years, leading to about $900 in annual dividends. We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.

Capital gains will almost certainly contribute to the overall returns as well. IBM has more than doubled in share price since 2007 for example. Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.

10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.

Our Take: The articles linked above for Intel and Microsoft ended up with an expected yield of close to 7% for buying at today's price level. Even though IBM's recent dividend growth rate is impressive, even if the company maintains a double digit dividend growth over the next 10 years, it would still fall short of Intel and Microsoft on the future yield on today's cost.

Conclusion: IBM is a great company and a good stock as well undoubtedly. It probably has better chances of nice capital appreciation than Intel and Microsoft. However, unless IBM dividends are improved substantially, Microsoft and Intel will prove to be better long term technology holdings for dividend growth investors seeking income.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. May pick up Intel and Microsoft in the low to mid 20s range.