International Business Machines (IBM 1.75%) took its penultimate step toward becoming a Dividend Aristocrat on Tuesday, raising its quarterly dividend for the 24th consecutive year. The company has doled out dividend payments to its shareholders without fail since 1916.
Shareholders of record as of May 10 will receive a quarterly dividend of $1.62 per share on June 10. That's up $0.05 over the previous dividend, representing a 3.2% increase. You have to go back to the financial crisis to find a dividend hike this small from IBM, and it's the smallest percentage increase since IBM began its 24-year streak.
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No surprises here
It's not a surprise that IBM chose to be conservative with its dividend increase this year. The company expects to close on its massive $34 billion acquisition of Red Hat before the end of 2019, loading up the balance sheet with debt. Bringing the debt to a reasonable level is a top priority -- so much so that IBM will suspend share buybacks in 2020 and 2021.
With a dividend increase this small and the intention to buy back shares prior to the 2020 hiatus, IBM won't raise its total dividend payments to shareholders by much. The company paid out about $5.68 billion over the past year in dividends; based on the current share count, which will likely decline throughout this year, IBM will pay $5.79 billion in dividends over the next year. That's up less than 2%.
The Red Hat acquisition is expected to quickly boost IBM's profitability, which will help fuel future dividend increases. The deal will be accretive to cash flow in the first year and accretive to adjusted earnings per share by the end of the second year. Red Hat generates close to $1 billion of free cash flow annually.
IBM remains committed to growing its dividend, but that growth will likely continue to be sluggish until Red Hat is fully digested and the debt stemming from the deal is reduced to comfortable levels. Low single-digit dividend hikes will probably be the best investors can hope for, at least for a while.
A solid dividend stock
Even with slow dividend growth, IBM remains a great stock for dividend investors. Because shares of the century-old tech company trade at depressed levels, the dividend yield currently sits around 4.6%, based on the new quarterly payment. For comparison, the S&P 500 sports a dividend yield below 2%.
The company is still struggling to return to consistent, sustainable growth. Revenue in the first quarter fell nearly 5% year over year, although currency was mostly to blame. However, its longtime cloud strategy, focused on hybrid, multi-cloud environments, is aligned with what's happening in the industry. IBM will never be a top provider of public cloud infrastructure like Amazon Web Services or Microsoft Azure, but it can be a leader in the hybrid cloud market.
IBM stock trades for just 10 times the company's full-year adjusted earnings guidance. With a beaten-down valuation and a sky-high dividend yield, the stock should be on the radars of dividend and value investors alike.
