International Business Machines Corporation (NYSE:IBM) will increase its dividend on the 10th of September to US$1.64. This will take the annual payment to 4.6% of the stock price, which is above what most companies in the industry pay.
Impressive dividend yields are good, but this doesn’t matter much if the payments can’t be sustained. Based on the last payment, International Business Machines’ profits didn’t cover the dividend, but the company was generating enough cash instead. Generally, we think cash is more important than accounting measures of profit, so with the cash flows easily covering the dividend, we don’t think there is much reason to worry.
Earnings per share is forecast to rise by 47.9% over the next year. If the dividend continues growing along recent trends, we estimate the payout ratio could reach 80%, which is on the higher side, but certainly still feasible.
Even over a long history of paying dividends, the company’s distributions have been remarkably stable. The dividend has gone from US$2.60 in 2011 to the most recent annual payment of US$6.56. This implies that the company grew its distributions at a yearly rate of about 9.7% over that duration. Companies like this can be very valuable over the long term, if the decent rate of growth can be maintained.
