You Probably Didn't Know This About International Business Machines Corp. Dividends

IBM's commitment to strong dividends is only matched -- and far surpassed! -- by its hunger for massive share buybacks.

May 9, 2014 at 2:00PM

IBM (NYSE:IBM) pays a lot of attention to its dividend. Over the last 10 years, Big Blue has increased its quarterly payouts by 510%. Every Dow Jones (DJINDICES:^DJI) component pays a dividend nowadays, but few can match IBM's commitment to giving back to shareholders.

The company's stock price doubled over the same period, taking some of the bite out of IBM's dividend yield. But a share price that rises too quickly is a nice problem to have.

IBM Chart

IBM data by YCharts.

However, IBM shares are not all wine and roses for income investors. Those payout boosts didn't come easy.

The rising dividend payouts represent a growing portion of IBM's free cash flow. The intertwined lines on this next chart are almost eerie:

IBM Cash Dividend Payout Ratio (TTM) Chart

IBM Cash Dividend Payout Ratio (TTM) data by YCharts.

Big Blue has a long history of generous dividend improvements, matched by an even larger dose of share buybacks. Since 2000, the company has spent $30 billion on dividend checks and $108 billion on share repurchases.

At times, the company has even borrowed money just to light a bigger fire under these shareholder-friendly policies. In the second quarter of 2007, IBM took out a massive $12 billion debt load (on top of its existing $23 billion in long-term debt) only to dump all the proceeds into buybacks. At no point did IBM's buybacks force it to slow down its dividend payments or even the pace of payout growth.


Image source: IBM.

Now, the second chart above isn't exactly terrifying. IBM's cash payout ratio is rising, but it still has plenty of headroom for future increases.

That might mean slowing down those sprightly buyback plans, though -- or maybe taking on even more debt to keep the two parties going. Over the last four quarters, IBM spent $18.4 billion on buybacks and $4.1 billion on dividends, exceeding the $12.5 billion in free cash flow. That means dipping into cash reserves or other capital sources.

IBM isn't likely to slow down its dividend growth anytime soon, but the buybacks might need a breather. Keep that in mind if you were hoping for a huge buyback benefit over the next few years.

Meet the top dividend stocks for the next decade
IBM is onto something here. The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Anders Bylund has no position in any stocks mentioned. The Motley Fool owns shares of International Business Machines. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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