International Business Machines (
) has been a tech stalwart for several decades. Here's why it's
time for the company to get serious about its dividend - and stop
wasting so much money on share buybacks.
Keeping up with the Joneses
This past May, IBM raised its quarterly dividend payout by 13%.
The new payout of 85 cents, up from 75 cents previously, seemed
like a decent move on the surface. With a current dividend yield of
just 1.8%, however, IBM's recent increase simply cannot compare
other tech giants like Microsoft (
) and Cisco (
Software giant Microsoft, which began paying a regular dividend
in 2003, recently upped its payout to 23 cents per quarter. This
new payout will cost the company $1 billion annually - a small sum
to keep shareholders happy. MSFT currently offers a healthy
dividend yield of 3.26%.
Networking equipment maker Cisco just started paying dividends
in 2011, starting with 6 cents every quarter. The dividend
increased to 8 cents in 2012, and was raised 75% in August to 14
cents. The new dividend payments will cost CSCO approximately $3
billion a year. The company currently offers a 3.3% yield, which is
an attractive level for dividend-minded investors.
IBM has yet to bring its dividend payout up to the level of its
major tech competitors - not that the company can't afford it.
Small Dividends, Big Buybacks
With about $12 billion in cash on the books, it's clear that IBM
could easily afford to double, or even triple its dividend. This
process would be even easier if the company diverted some of the
money it spends each year on share buybacks to its dividend
program. In 2011, in fact, IBM bought back about $12.6 billion
worth of its own shares, yet paid out only $3.5 billion in
Here at Dividend.com, it's no secret we simply don't like share
buybacks. All too often, buybacks are used as a tool to pad a
company's earnings per share and to allow executives to cash out of
lucrative stock options. Sometimes, companies even buy back shares
only to reissue them to employees. For these and many other
reasons, we firmly believe IBM is much better off using its excess
cash to either expand its business or distribute the money directly
to shareholders via higher dividends. Yet IBM plans to spend even
more on buybacks in coming years.
Give Investors What They Want: Higher Dividends
IBM, due in no small part to its lowish dividend yield, has
underperformed the markets in 2012. Since the beginning of the
year, its stock has risen just 3%, compared with a nearly 10% gain
for the benchmark S&P 500 Index (
). In fact, IBM's 1.8% yield pales in comparison even to SPY's
yield of about 2.25% - and an index like SPY is hardly considered
an income play.
In the current low interest rate environment, stocks with higher
yields are much more attractive to many investors. Unless it raises
its dividend up to par with its competitors, IBM runs the risk of
continued underperformance. Without a solid yield to fall back on,
stocks like IBM can quickly fall out of favor with investors
looking for share price growth.
The Bottom Line
IBM may needs to adjust its strategy and join the recent
movement of offering higher dividends to investors. After a big
rise in share price from 2006 through 2011, IBM has been nothing
but dead money over the past year. The bulk of its share price move
is likely behind it.
As a mature company, it is time to stop playing the buyback game
and start giving investors what they really want. For IBM to be
considered a viable investment moving forward, it must demonstrate
a newfound dedication to rewarding shareholders - not with
buybacks, but with much healthier dividends.
International Business Machines(
) is not recommended at this time, holding a Dividend.com DARS™
Rating of 3.4 out of 5 stars.
Be sure to visit our complete recommended list of the
Best Dividend Stocks
, as well as a detailed explanation of
our ratings system here