Given the struggles of International Business Machines' (IBM 0.22%) stock over the last decade, the company may have become an afterthought in the minds of many investors.
However, a move into the cloud industry and a spinoff of a low-growth business seems to have improved revenue growth. Moreover, it maintained annual dividend increases in more challenging times, taking the percentage yield of the payout higher over time. This rising dividend, along with a decisive strategic shift, could make IBM an excellent choice for dividend investors regardless of the market.
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How IBM's dividend just became a safer bet
The spinoff of Kyndryl (KD -0.39%) has become transformational for the venerable tech giant. Before the spinoff, IBM had become a low-growth IT conglomerate whose stock had stagnated over the last 10 years.
The purchase of Red Hat in 2019 made it more of a cloud company, one specifically geared toward the hybrid cloud. This offering allows public and private clouds to interact seamlessly. Now, with the spinoff of Kyndryl, it has become primarily focused on transforming into a cloud and supercomputing company.
Through Red Hat, IBM serves as a cloud infrastructure play, albeit one that faces stiff competition. Cloud offerings such as Amazon's AWS, Microsoft's Azure, and the Google Cloud supported by Alphabet dominate this space, according to Kinsta. Still, IBM has led the way in hybrid cloud development, utilizing Red Hat OpenShift's Kubernetes platform to facilitate communication between private and public clouds. This niche gives IBM a viable path for success in the cloud.
Why this matters to dividend investors
But what may be more important to investors is what did not happen. Instead of splitting the payout with Kyndryl, IBM chose to maintain the entire payout, a $6.56 per share annual dividend.
This is significant because it produces a cash return of 5.2%, nearly quadrupling the S&P 500 average of 1.4%. Also, to maintain its status as a Dividend Aristocrat, it has to increase its payout every year. The status as an Aristocrat tends to keep investors in the stock, dramatically increasing the likelihood that the dividend growth will continue.
IBM appears well-positioned to maintain the dividend. The company reported $7.9 billion in baseline free cash flow for 2021, excluding Kyndryl-related charges and pre-separation costs. This covered the $5.9 billion in dividend costs for that year.
Moreover, IBM expects mid-single-digit revenue growth annually and cumulative cash flows of approximately $35 billion between 2022 and 2024. Considering the dividend costs in 2021, this should give the company sufficient latitude to cover annual payout hikes.
Furthermore, in Q4, it grew revenue 7% year over year to $16.7 billion. This is a considerable improvement from Q4 2020 when revenue fell 6% from the year-ago quarter. Also, revenue in 2021 came to $57.4 billion, a 4% increase that includes Kyndryl's revenue in the 10 months of the year that it belonged to IBM, showing that the spinoff has helped to boost revenue.
Finally, Mordor Intelligence forecasts a compound annual growth rate of 21% for the hybrid cloud through 2026. IBM's cloud revenue in 2021 amounted to $20.2 billion, rising by 20% in 2021. This indicates that the company's hybrid cloud expansion is consistent with estimates, a factor that should keep the dividend costs affordable for IBM.
IBM as a dividend stock
Thanks to the Kyndryl spinoff, IBM has reinforced its status as a robust and high-yielding dividend stock. The divestiture of Kyndryl has made IBM a stronger company positioned for faster revenue growth. Moreover, a Dividend Aristocrat status and a payout backed by an expanding cloud business should make it an excellent choice for income investors seeking a stock yielding more than 5%.
