Updated on March 25th, 2024 by Bob Ciura
Every year, we review each of the Dividend Aristocrats, the group of companies in the S&P 500 Index with 25+ consecutive years of dividend increases.
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:
Disclaimer: Sure Dividend is not affiliated with S&P Global in any way. S&P Global owns and maintains The Dividend Aristocrats Index. The information in this article and downloadable spreadsheet is based on Sure Dividend’s own review, summary, and analysis of the S&P 500 Dividend Aristocrats ETF (NOBL) and other sources, and is meant to help individual investors better understand this ETF and the index upon which it is based. None of the information in this article or spreadsheet is official data from S&P Global. Consult S&P Global for official information.
Next up in the Dividend Aristocrats In Focus series is International Business Machines (IBM). IBM has increased its dividend for 29 years in a row.
IBM has turned itself around in the past few years by investing in new areas such as artificial intelligence, data, and cloud services which have returned the company to growth.
In turn, IBM shares have rallied 47% in the past 12 months, far outpacing the S&P 500 Index performance. This article will discuss IBM’s current business model, future growth prospects, and whether we see the stock as a buy right now.
Business Overview
IBM’s focus is running mission critical systems for large, multi-national customers and governments. It typically provides end-to-end solutions. IBM spun off Kyndryl, its managed infrastructure business, in 2021 but is still one of the largest IT services companies in the world.
The company now has four business segments: Software, Consulting, Infrastructure, and Financing. IBM had annual revenue of ~$61.9B in 2023.
IBM reported fourth-quarter and full-year results on January 24th, 2024. For the quarter, company-wide revenue rose 4% to $17.38 billion while diluted adjusted earnings per share climbed 8% to $3.87 on a year-over-year basis. Diluted GAAP earnings per share increased 13% to $3.54 in the quarter.
Source: Investor Presentation
Software revenue increased 3.1% to $7.5 billion due to 2% growth in Hybrid Platform & Solutions and a 5% increase in Transaction Processing. Revenue was up 8% for RedHat, 1% for Automation, and 1% for Data & AI.
Consulting revenue increased 6% to $5,048M from $4,770M due to 5% rise in Business Transformation, +4% increase in Technology Consulting, and 6% growth in Application Operations. The book-to-bill ratio is a healthy 1.15x.
Growth Prospects
IBM engineered a successful turnaround in the past few years, and there are signs emerging that IBM’s turnaround is gaining traction.
Its priority 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.
In 2023, IBM continued its habit of frequent tuck-in acquisitions. IBM acquired software company Apptio for $4.6 billion, expanding its AI offerings. The company followed that up with the acquisitions of StreamSets and webMethods. IBM has acquired 30+ companies under the present CEO.
IBM forecasts revenue growth in the mid-single-digits and free cash flow of about $12 billion in 2024. We expect 4% annual EPS growth for IBM over the next five years.
Competitive Advantages & Recession Performance
IBM has enjoys meaningful competitive advantages, primarily its industry leadership position and scale. IBM’s competitive strength is its brand, entrenched customer relations and extensive patent portfolio. IBM is also the market leader in mainframe computers where it has 90% of the market and little competition.
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 2008-2009. IBM’s performance during that recession is listed below:
- 2008 earnings-per-share: $8.93
- 2009 earnings-per-share: $10.01 (12% increase)
- 2010 earnings-per-share: $11.52 (15% increase)
- 2011 earnings-per-share: $13.06 (13% increase)
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 2024 estimate of $10 in earnings-per-share, and the current stock price of $188, shares of IBM trade at a price-to-earnings ratio of 18.8.
The stock trades above our fair value P/E estimate of 13.0. The impact of a declining valuation multiple could reduce annual returns by 7.1% per year over the next five years. Therefore the stock seems to be significantly overvalued right now.
These negative returns could be offset by earnings-per-share growth and dividends. As previously mentioned, we expect 4% annual EPS growth through 2029.
In addition, the stock has a current dividend yield of 3.5%. Overall, we estimate total returns at 0.4% per year over the next five years.
The stock price has risen quickly on better performance and AI optimism, and is now near a decade-high. The low rate of return is due to the overvaluation of the shares right now.
Final Thoughts
In 2021, IBM was inducted to the prestigious Dividend Aristocrats list. IBM has continued to raise its dividend each year due to its steady growth and strong free cash flow.
IBM’s financial performance is improving, and the company is deleveraging. It should be able to continue raising its dividend each year.
That said, the stock appears to be overvalued due to its share price rally over the past year. The low expected returns make the stock a sell in our view.
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 Dividend Achievers List: a group of stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List: considered to be the best-of-the-best among dividend growth stocks, the Dividend Kings are a group of exceptional dividend stocks with 50+ years of consecutive dividend increases.
- The Blue Chip Stocks List: contains stocks on either the Dividend Achievers, Dividend Aristocrats, or Dividend Kings list.
- The Monthly Dividend Stocks List: contains stocks that pay dividends each month, for 12 payments per year.
- The High Dividend Stocks List: high dividend stocks are suited for investors that need income now (as opposed to growth later) by listing stocks with 5%+ dividend yields.
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: