International Business Machines Corporation (NYSE:IBM) provides information technology (IT) products and services worldwide. This dividend achiever has paid uninterrupted dividends on its common stock since 1913 and increased payments to common shareholders every year for 16 consecutive years. Most recently, billionaire investor Warren Buffett made public his 5% stake in IBM, along with his stakes in several new companies.
The most recent dividend increase was in May 2011, when the Board of Directors approved a 15.40% increase in the quarterly dividend to 75 cents/share. IBM’s largest competitors include Infosys (NASDAQ:INFY), Wipro (NYSE:WIT) and Accenture (NYSE:ACN).
Over the past decade this dividend growth stock has delivered an annualized total return of 8% to its shareholders.
The company has managed to deliver a 11.60% annual increase in EPS since 2001. Analysts expect IBM to earn $13.36 per share in 2011 and $14.79 per share in 2012. In comparison IBM earned $11.52 /share in 2010. IBM has publicly announced its goal to hit $20 in earnings per share by 2015. The company is one of the most consistent repurchasers of stock, having reduced the total shares outstanding by 50% since 1995.
IBM has transformed itself from a hardware company to services, solutions and software conglomerate. The company’ expansion overseas, focus on high margin software and providing solutions to customers, investing in innovation should help it in achieving its goals. The company faces some pricing pressure from competitors, and risks related to failure to transition new products successfully. However, given the company’s economies of scale, contiguous focus on building and maintaining strong client relations and drive to innovate, it should weather any near term weaknesses successfully.
The company’s Return on Equity has doubled over the past decade. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 18.30% per year since 2001, which is higher than the growth in EPS. I would expect IBM to keep increasing in dividends at 10% per year at least for the foreseeable future.
An 18% growth in distributions translates into the dividend payment doubling every four years. If we look at historical data, going as far back as 1993 we see that IBM has actually managed to double its dividend every four and a half years on average. The company did cut distributions by 80% in 1993. If the company diverts the money it uses for share buybacks, its dividend payment could have easily topped $14/share in 2010.
The dividend payout ratio has remained low below 25% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently IBM is cheap at 15.30 times earnings, has a sustainable dividend payout but yields a paltry 1.60%. I would keep IBM on my radar, and would consider it for inclusion in my dividend growth portfolio on dips below $120/share, which is the equivalent of a 2.50% yield at current dividend rates.