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Dividend Aristocrats In Focus: International Business Machines

Published on January 30th, 2023 by Quinn Mohammed

Every year, we review each of the Dividend Aristocrats, the exclusive group of companies in the S&P 500 Index with 25+ consecutive years of dividend increases.

This is a prestigious list of stocks, as the Dividend Aristocrats represent some of the strongest businesses in the world.

To become a Dividend Aristocrat, a company must possess durable competitive advantages and a steady business model that generates yearly profits, even during recessions.

But it must also have a shareholder-friendly management team dedicated to maintaining consistent dividend increases each year.

We have compiled a list of all 68 Dividend Aristocrats and important financial metrics such as price-to-earnings ratios and dividend yields. You can download the full list by clicking on the link below:


Next up in the Dividend Aristocrats In Focus series is International Business Machines (IBM). Last year, IBM raised its dividend for the 27th year in a row. The increase, however, was paltry, at only 0.6%.

IBM has struggled through a prolonged turnaround effort in the past few years. It has invested heavily in new areas such as artificial intelligence, data, and cloud services while attempting to return to growth.

These efforts have had mixed results. However, IBM has continued to raise its dividend each year.

With a high dividend yield near 5% and consistent dividend increases each year, income investors could view IBM stock favorably.

Business Overview

IBM is a global information technology company that provides integrated enterprise solutions for software, hardware, and services. IBM is one of the largest IT services companies in the world. The company’s focus is running mission-critical systems for large, multi-national customers and governments. IBM typically provides end-to-end solutions.

Following its spin-off of Kyndryl, its managed infrastructure business, on November 3rd, 2021, the company now has four business segments: Software, Consulting, Infrastructure, and Financing.

On January 25th, IBM reported the fourth quarter and full year 2022 results. For the fourth quarter, the revenue of $16.7 billion was flat year-over-year but up 6% at constant currency.

Over the last 12 months, hybrid cloud revenue of $22.4 billion was up 11%, or 17%, at constant currency.

Source: Investor Presentation

Earnings-per-share from continuing operations rose 15% year-over-year to $3.13. Adjusted EPS rose just 7% compared to Q4 2021, to $3.60.

For the full year 2022, the company achieved revenue of $60.5 billion, which was up 6% compared to 2021 or up 12% at constant currency. Diluted earnings-per-share from continuing operations was $1.95, a significant 63% decline from 2021.

IBM’s disappointing EPS performance was impacted by a one-time, non-cash pension settlement charge in Q3 amounting to $5.9 billion related to transferring a portion of the company’s U.S. defined benefit pension obligations.

Non-GAAP diluted EPS increased 15% compared to 2021 to $9.13 for 2022. For 2023, IBM’s consensus EPS estimate stands at $9.49 at this time.

Growth Prospects

While the company has found it difficult to generate growth over the past several years to its transition to cloud and SaaS in the IT industry and its relative lateness in entering this market, IBM appears to have entered its turnaround phase. In 2022, IBM saw revenue return to growth.

And there are signs emerging that IBM’s turnaround is gaining traction.

Its strategic imperative is to become a leader in artificial intelligence and hybrid cloud solutions. It has invested aggressively in these areas, such as the $34 billion acquisition of Red Hat in 2019.

IBM sees the hybrid cloud as a $1 trillion market and its most significant opportunity to return to growth in the future.

It plans to accelerate client adoption of hybrid cloud and AI. This would help deliver innovation and help enhance its portfolio.

Source: Investor Presentation

Some of these initiatives are already showing positive results.

In 2022, IBM’s hybrid cloud revenue increased 12% at constant currency over the last 12 months, reaching $22.4 billion. Red Hat revenue increased 15% for the year at constant currency.

As growth areas such as the cloud become a larger portion of IBM’s overall revenue, there is hope that the company will return to growth. IBM management expects to grow revenue for 2023 by mid-single digits.

It also expects adjusted free cash flow greater than $10.5 billion in 2023. This would represent over $1 billion in year-over-year growth.

We expect 4% annual EPS growth for IBM over the next five years. This forecast is based primarily on modest revenue growth.

Competitive Advantages & Recession Performance

Despite its lack of growth in the past few years, IBM still enjoys meaningful competitive advantages.

Specifically, it has an industry leadership position and scale.

Holding such strong positions in its core strategic areas gives IBM a better chance of successfully returning to growth.

In terms of recession performance, IBM receives mixed reviews. As a global technology company, IBM is exposed to the fluctuations of the broader economy.

For example, in 2020, the company’s revenue and earnings-per-share declined as the global economy fell into recession due to the coronavirus pandemic.

That said, IBM performed relatively well in the Great Recession of 2007. IBM’s performance during that recession is listed below:

It is quite impressive that IBM was able to grow its earnings-per-share in each year of the Great Recession. Moreover, the dividend kept increasing as well.

While the company’s recession performance was not as strong in 2020, it did remain highly profitable, which allowed it to keep its dividend increase streak alive.

Valuation & Expected Returns

Based on our 2023 estimate of $9.49 in earnings-per-share, and the current stock price of $134, shares of IBM trade at a price-to-earnings ratio of 14.2.

The stock trades above our fair value P/E estimate of 12.0. The impact of a declining valuation multiple could reduce annual returns by 3.3% per year over the next five years.

These negative returns could be offset by earnings-per-share growth and dividends. As previously mentioned, we expect 4% annual EPS growth through 2028.

In addition, the stock has a high current dividend yield of 4.9%. Overall, we estimate total returns at 6.1% per year.

This is a decent but modest expected rate of return. Therefore, we rate the stock a hold. However, IBM could be an attractive stock specifically for income investors searching for high yields.

We believe the dividend is safe, given the company’s strong cash flow generation.

Final Thoughts

In 2021, IBM was inducted to the prestigious Dividend Aristocrats list, but investors may not have noticed due to the company’s ongoing fundamental difficulties.

But despite the persistent decline in revenue over the past few years leading up to 2022, IBM has continued to raise its dividend each year due to its steady profitability and strong free cash flow.

IBM’s performance is improving, and the company is deleveraging.

The separation of Kyndryl will alter IBM as it becomes more of a software and consulting company rather than a services company. This should benefit IBM as software sales are higher-margin.

With a high dividend yield of 4.9%, and a rising dividend each year, we view IBM stock as a hold for income investors.

If you are interested in finding high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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