IBM: What's The Dividend Raise?

Summary

• Next dividend declaration expected in late April.
• How has the balance sheet/cash flow situation changed?
• Another dime increase seems fair.

April is an important month for investors, because it is the start of earnings season for calendar Q1 2018. For a number of companies, investors are also looking for dividend raises. One such name is International Business Machines (NYSE:IBM), which last raised its quarterly payout in April 2017. Today, I'm here to provide my expectation for what a raise could look like this year.

As you can see in the chart below, IBM's dividend has doubled since 2011. Last year, the board announced a $1.50 quarterly rate, which I used for the "2017" year below. This was a dime per share per quarter rate, an increase of more than 7%, and at the time, represented a forward yield of about 3.7%. Shares were a couple of percent higher at that time, so investors buying now are receiving a higher yield even before considering a dividend hike.

(Source: IBM financial information page)

IBM overall is at an interesting place. Three months ago, the company finally ended its multi-year streak of revenue declines, but unfortunately margins were a disappointment. With a weaker dollar so far this year, there will be a tailwind to the company's top line, but will that translate to the bottom line? Current expectations call for a little more than 1% revenue growth this year, but adjusted earnings per share are forecast to increase ever so slightly, and that includes the benefit from the company's ongoing buyback.

Despite adjusted earnings being kinda flat the past few years, IBM has still generated tons of cash flow. In the table below, I've detailed some key metrics as well as some major uses of cash. The increased amount in share repurchases in 2017 meant that the share count came down a little faster than the prior-year period, which obviously helps with any potential dividend raise.

(Data sourced from page 81 of company's annual filing)

There still is plenty of room for IBM to raise its dividend, so the question will be how much of an increase do investors see? After two years where the raise was a dime, I think that's a good number to guess for this year as well. In the chart below, I've detailed what a raise could look like, and my range goes two cents in either direction from that dime.

*As of Friday's close.

Unless the dividend raise really disappoints, or IBM shares rally a bit before the announcement, it seems rather likely that the new forward annual yield will be above 4.00%. That's a lot more income than you'll get from US treasuries at the moment, and it also is one of the best yields you'll get from large cap technology. In the end, IBM is set to raise its dividend again, and investors should be looking for another solid increase.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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