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Why IBM Remains A Positive Dividend Story

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Nonstop dividend hikes for 22 years

Many investors have opted for IBM (IBM) because of the dividend income they receive from the company. It has increased its annual dividend payout amount for 22 years in a row. While IBM isn’t a dividend aristocrat—a company that has raised its annual dividend for at least 25 years nonstop—it has a great track record.

IBM’s dividends have remained secure despite its prolonged transition to a new business model weaved around modern IT (information technology) such as enterprise mobility, social, and data analytic solutions.

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IBM shows prudent cash usage

For a hint of the future of dividends at IBM, investors can look at the company’s dividend payout ratio, the portion of profits that a company sets aside for dividends. When a payout ratio is low, it shows that a company is spending just a small fraction of its net income on dividends while storing up or reinvesting (QQQ) the rest. A higher payout ratio is a cause for concern, especially for a business in the middle of a transition like IBM.

IBM has maintained a payout ratio of below 50.0% over the past several years. In 2016, its payout ratio was 44.3%, implying prudent cash usage. Wells Fargo (WFC) analysts expect IBM to continue managing its cash prudently, and predict a 2017 payout ratio of 42.7%.

Pressure of nurturing Strategic Imperatives

IBM’s newer business, Strategic Imperatives, could pose a risk to future dividends as the company continues to rely on mature operations to bankroll the segment. Sales from mature businesses are shrinking, thanks in part to tough competition from the likes of Oracle (ORCL) and Hewlett Packard Enterprise (HPE).

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