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Inside IBM's Enduring Revenue Challenge

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Part 16
Inside IBM's Enduring Revenue Challenge PART 16 OF 21

Could IBM Continue to Be a Favorite among Dividend-Seeking Investors?

IBM has highest dividend yield among peers

International Business Machines’ (IBM) current dividend yield of more than 4% represents the highest yield among its peers. Investors and shareholders prefer dividends as they view it as a steady income. This explains IBM and its peer Oracle’s (ORCL) focus on dividend payments.

IBM’s dividend yield was one of the reasons why Warren Buffett’s and Berkshire Hathaway took an interest in IBM.

Could IBM Continue to Be a Favorite among Dividend-Seeking Investors?

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It was IBM’s dividend strategy and yield that made it one of Cornerstone Macro’s 2017 Dogs of the Dow. The Dogs of the Dow follow an income-focused investment strategy that looks for appealing opportunities by investing annually in the ten companies in the Dow Jones Industrial Average (DIA) (DJIA-INDEX) that have the highest dividend yields.

Reasoning behind IBM’s high dividend yield

Reducing its share count has helped IBM consistently increase its dividend payouts, despite its falling revenues and earnings. Its payout has risen ~400% in the past decade. IBM’s dividend yield has been on an upward trend due to the low growth in its stock price and its high dividend growth.

This trend is concerning because, if IBM’s upward dividend payout trend continues, it could face difficulty in terms of investments, growth, and expansion—unless its earnings outpace its dividend growth. However, such an expectation looks nearly impossible, given IBM’s 21 quarters without revenue growth.

This revenue story is likely what prompted Warren Buffet to rethink his investment in IBM. Buffett recently cut short his losses by selling one-third of his stake in the company. At one point, Warren Buffett was IBM’s largest shareholder.

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