IBM Stock: Stable Dividend or Stagnant Investment?

The AI race has heated up significantly but returns on investments in artificial intelligence remain far off on the horizon. 

According to a survey from Boston Consulting Group, even after a mad scramble over the past few years to incorporate AI, only 26% of companies have developed the necessary capabilities to move beyond the idea and actually generate some gains for themselves.

During this transition period when businesses experiment to figure out how best to incorporate AI to enhance their own P&Ls, the bulk of the returns favor big names and first-movers. One titan of the tech industry that has been overlooked in this regard, but perhaps unfairly so, is IBM.

Is the former goliath of the technology industry worth investing in and how safe a play is it?

Is IBM a Play on AI?

International Business Machines Corporation (NYSE:IBM) is a well-established name in tech known for bringing computing machines into the limelight but is not exactly the first name that comes to mind when we think of AI – in spite of Watson arguably being the first computer to bring AI publicity to the masses.

IBM uses its AI capabilities mainly as a consulting service to help other companies figure out what to do with AI. In many ways this is actually a perfect business at this time because that’s exactly the problem so many management teams face: how to apply AI into their own ecosystems?

Clearly, the model has been successful as evidenced by IBM’s stock ascent in recent years. The company’s share price gained close to 30% over the past year and has been up by 23% over the past six months, which is not necessarily something to write home about given the market’s returns but nothing to sneeze at all the same. 

The fact that the share price has neither been tanking nor skyrocketing is evidence of a fairly stable investment opportunity.

Further cementing the safe play theme is the fact that the company pays stable dividends. The predictability and history of these are a huge testament to IBM’s financial stability and market standing. The question is whether the fortress business can thrive long into the future and remain a good investment for new buyers?

Is IBM’s Dividend Stable and Safe?

How many companies have you come across that have paid dividends to their shareholders since 1913? The answer, at best, will be a few, which in and of itself speaks very favorably about IBM’s record of stability and balance sheet management across generations.

On the other hand, there has not been much growth to speak of in the actual dividend rates. For instance, over the past three years, the dividend has only grown at a compound annual growth rate of 1.4%, while over the past five years, the CAGR improved by a minuscule 1.5%. Still, to its credit, IBM has also seen 25 consecutive years of dividend growth.

The Board of Directors last declared a quarterly dividend of $1.67 per share and that translates to an annual dividend rate of $6.68 per share, yielding 2.66% at the current share price. This is also lower than the four-year average yield of 4.37%.

It has a high payout ratio of 64.57%, which implies lower retained earnings. The elevated payout ratio is good, but at the same time, it highlights the fact that this could limit the company’s ability to grow its dividends by leaps and bounds.

Is IBM Financially Stable?

IBM is financially stable with a century long history of paying dividends, over $14 billion in cash and manageable debt of $49 billion.

Although it’s trading at a high earnings multiple of 40x now and analysts have a price target of $254 per share, below where the stock is trading presently, the fortress-like balance sheet creates a moat that makes IBM capable of withstanding booms and busts alike. 

IBM has last reported its fourth quarterly and fiscal year results for 2024 and generated $17.55 billion in revenues, just 1% higher than the prior year’s period. This was also a bit better than the figure Wall Street analysts had been projecting of $17.54 billion.

In spite of the decidedly so-so growth in the overall top line, IBM posted its best day on Wall Street since 2000 following this result, and that’s because the company’s software segment grew by 10% year-over-year to $7.92 billion. 

There’s also a reason the market took extremely kindly to this gain, and that’s because the demand for AI technology was cited as one of the reasons, alongside strong performance from its Red Hat Linux operating system.

Anything AI touches is considered gold in the market now, which is why the news of IBM recording $5 billion in bookings for its generative AI business was so well-received. Why is this important? It includes sales in its software and consulting segments.

Before signing off, we should note that while IBM is a stable firm, rivals like Apple, Amazon, and Alphabet are even more stable financially both on the P&L and balance sheet.

---

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.