Why Income Investors Should Take a Second Look at IBM Stock
A Dividend Growth Stock at a Low Price?
Income investors are always on the lookout for value. But the blunt reality is that with all three major indices of the U.S. stock market soaring past their all-time highs, bargains are hard to find. Still, there is one mega-cap company that could represent some serious value at today’s price. And it pays pretty generous dividends too.
I’m talking about International Business Machines Corp. (NYSE: IBM), one of the oldest technology companies in the U.S.
While tech stocks are known for shooting through the roof these days, IBM stock was left behind; year-to-date, the stock is down 13.8%. In fact, at $142.94 apiece, IBM stock is trading near its 52-week low.
One of the consequences of being a down-and-out stock is that the company now offers a very attractive dividend yield. Because dividend yield moves inversely to a company’s stock price, the downturn in IBM stock has pushed its yield to a 4.2%. That’s a pretty decent number in today’s market. As a matter of fact, IBM is currently the second-highest-yielding name among companies that make up the Dow Jones Industrial Average.
Now, I know what you are thinking: the main reason behind the disappointing performance of IBM stock is that the company’s business wasn’t going that great. However, I should point out that even though its revenue and earnings may not be as impressive as before, this legacy tech company still has no problem covering its dividends.
In 2016, IBM generated $13.59 in earnings per share while paying $5.50 of dividends per share. That’s a payout ratio of 40.5%, not a high number by any means. (Source: “IBM Reports 2016 Fourth-Quarter and Full-Year Results,” International Business Machines Corp, January 19, 2017.)
The dividends have been growing too, with IBM having raised its quarterly dividend rate every year for the past 22 years. Over the last 10 years, the company’s per-share payout has increased by 400%. (Source: “Dividends,” International Business Machines Corp, last accessed August 24, 2017.)
For the current year, IBM is scheduled to pay $5.90 in dividends per share. The company also expects to generate earnings of at least $13.80 per share for the full year, which would be more than enough to cover its increased dividends. (Source: “IBM Reports 2017 Second-Quarter Results,” International Business Machines Corp, July 18, 2017.)
IBM Stock: A Value Proposition
With consistent dividend growth and a low payout ratio, IBM could be a solid pick for dividend growth investors.
Best of all, with the stock being down, IBM offers a value proposition that’s hard to find in today’s market. At $142.94 per share, IBM stock has a price-to-earnings (P/E) multiple of 11.8 times, significantly lower than the industry’s average P/E of 20 times. Moreover, the company’s price-to-sales ratio of 1.7 times and price-to-cash flow ratio of 8.3 times are also much lower than the industry’s averages. (Source: “International Business Machines Corp (IBM.N),” Reuters, last accessed August 24, 2017.)
It’s hard to say when IBM stock will finally get back on the growth track. But at it stands, the company offers a solid dividend growth opportunity for a reasonable price.