Yahoo Finance Don't Buy International Business Machines Corporation (NYSE:IBM) For Its Next Dividend Without Doing These Checks
It looks like International Business Machines Corporation (NYSE:IBM) is about to go ex-dividend in the next four days. You can purchase shares before the 7th of May in order to receive the dividend, which the company will pay on the 10th of June.
International Business Machines's next dividend payment will be US$1.64 per share, and in the last 12 months, the company paid a total of US$6.56 per share. Based on the last year's worth of payments, International Business Machines has a trailing yield of 4.6% on the current stock price of $141.88. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether International Business Machines has been able to grow its dividends, or if the dividend might be cut.
Check out our latest analysis for International Business Machines
Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. International Business Machines paid out 110% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. That said, even highly profitable companies sometimes might not generate enough cash to pay the dividend, which is why we should always check if the dividend is covered by cash flow. Fortunately, it paid out only 37% of its free cash flow in the past year.
It's good to see that while International Business Machines's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. International Business Machines's earnings per share have fallen at approximately 15% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. International Business Machines has delivered an average of 9.7% per year annual increase in its dividend, based on the past 10 years of dividend payments. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. International Business Machines is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
To Sum It Up
From a dividend perspective, should investors buy or avoid International Business Machines? It's never great to see earnings per share declining, especially when a company is paying out 110% of its profit as dividends, which we feel is uncomfortably high. Yet cashflow was much stronger, which makes us wonder if there are some large timing issues in International Business Machines's cash flows, or perhaps the company has written down some assets aggressively, reducing its income. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of International Business Machines.
With that being said, if you're still considering International Business Machines as an investment, you'll find it beneficial to know what risks this stock is facing. For example, we've found 4 warning signs for International Business Machines that we recommend you consider before investing in the business.
We wouldn't recommend just buying the first dividend stock you see, though. Here's a list of interesting dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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