Is IBM a Good Dividend Stock?

Is IBM a Good Dividend Stock? International Business Machines Corporation [NYSE:IBM] is a technology company that’s been around for over a century. Its subsidiaries include The Weather Company, Red Hat, and PwC Consulting, among others.

IBMs inventions, like the ATM, hard disk drive, magnetic stripe card, SQL programming language, and the UPC barcode are so ubiquitous in society, it’s hard to believe they came from one company.

This award-winning, global company now focuses on cloud computing, artificial intelligence (AI), Internet of Things (IoT), data analytics, security, and more. It developed bots like Deep Blue and Watson that beat humans’ best minds at their own games.

With so much history, the question of future innovation remains – does IBM deserve your investment? Let’s dive into the company’s current state and future ambitions to determine how investors have fared over the past 100+ years. It’ll help understand the moves it’s making today to prepare for tomorrow.

Is IBM Dividend A Value Trap?

IBM has a solid dividend history, according to Nasdaq. This includes a payout ratio of 14.28% and a dividend yield of 5.07%, amounting to a $6.52 annual dividend heading into August 2020.

The company had several growth years over the 2010s, but revenues have steadily declined as well, while the share price gradually heads toward the $100 range by the end of 2020.

Looking back on IBM’s history, it had several growth spurts at the turn of the millennium and start of the 2010s. These spurts happened at the tail end of key moments of declining company value (and values).

The turnaround in the late 90s is attributed to a change of leadership to former RJR Nabisco CEO Lou Gerstner. By 2010, the company landed several lucrative awards and contracts that propelled business.

Unfortunately, IBM also has documented cultural problems that kept stock values trending downward for the past decade. It certainly wasn’t immune to the effects of the COVID-19 crisis, as the company laid off thousands of workers.

Everyone from retailers to the media experienced tight margins in the aftermath of the worldwide business shutdowns enacted by government leaders.

 This leads many to wonder what’s on the horizon to turn the company around in the aftermath of the COVID-19 novel coronavirus outbreak.

Why Buy IBM Stock?

IBM’s latest technology bet is in the realm of quantum computing. Since debuting at CES 2019, the company now has 18 quantum computers and is on a path to double its quantum computing power every year, essentially building out the world’s most advanced cloud infrastructure ahead of major tech competition, like Google, Microsoft, Honeywell, and more.

The company also hired 30-year IBM engineering veteran Arvind Krishna as CEO in April 2020 to help steer a deteriorating company back into profitability.

Even though IBM has a long and storied history, its sales are slacking, and Krishna’s first 100 days at the helm come during a turbulent economic time. It’s showing growth in cloud computing during a rough economic time though.

Analysts are split between holding and buying IBM stock, which means its stock is expected to perform solidly for investors over the next five years.

Much of this is driven by the company’s acquisitions, like the $34 billion Red Hat acquisition in the summer of 2019. It’s also pushing to maintain its business in key sectors like financial services and government.

The company’s 2019 revenue of $77 billion was lower than 2017 or 2018. Still, it juiced $9.4 billion in profits from that revenue, as opposed to $5.8 billion in 2017. That means the company’s operations and overhead spending are being curbed. This gives it room to spend its way through the COVID-19 crisis the same way it did the Great Depression.

Still, IBM’s recovery will need to come at the expense of competition that’s not willing to let go easily.

Should You Sell IBM Stock?

Although the coronavirus pushed adoption of cloud computing options, it doesn’t mean that IBM is the company people will choose. Remember the culture problem referenced earlier?

IBM never laid workers off during the Great Depression. In fact, that’s when co-founder and CEO Thomas J. Watson really laid the foundation for the company as we know it today.

He not only kept businesses open and employees paid, but he increased spending on research and development. This fueled the company’s growth, and today’s IBM is doing the opposite.

Meanwhile, competitors like Honeywell are pushing the edge of quantum computing out further every day. Honeywell also promised to make it compatible with Microsoft’s Azure platform to encourage further development on viable ecosystem. It’s not alone – Intel’s partnership with QuTech is developing another step in quantum computing.  

Even Amazon has its hat in the ring as competition for many of IBM’s core revenue streams. These typically come from Software-as-a-Service (SaaS) through Infrastructure-as-a-Service (IaaS) revenue models. While IBM has a lot of resources available, its track record suggests it’ll continue declining in value until something drastic is done.

In the meantime, you may want to consider limiting your exposure to IBM through the Dow Jones Industrial Average. This mitigates any potential losses through the other 29 member companies.

Is IBM A Good Dividend Stock?

IBM is one of the oldest companies in the U.S. and has lasted for over a century. Its stock price has been slowly but steadily declining over the past decade, but it still returns a healthy dividend payout to shareholders. This is based on the company’s constantly pivoting revenue streams, which have been declining as well.

Still, IBM remains one of the 30 companies in the Dow for a reason. It provides consistent long-term returns, despite experiencing economic downturns. Whether you choose to invest directly or through the Dow Jones index, IBM is a dividend stock worth holding.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.