International Business Machines (IBM +0.78%) announced a $0.01 per share dividend hike on Tuesday, extending its streak of annual payout increases to 30 years. The quarterly dividend that will be paid on June 10 to shareholders of record as of May 9 will be $1.68 per share. At the current share price, IBM stock now has a forward yield of about 2.8%
IBM has paid quarterly dividends uninterrupted since 1916, and it has raised them through the bursting of the dot-com bubble, the financial crisis, the pandemic, and now the outset of President Donald Trump's global trade war. While its latest increase was small, it made IBM a bit more attractive for income investors.
NYSE: IBM
Key Data Points
A safe dividend in times of turmoil
IBM isn't immune from a potential economic slowdown caused by Trump's unpredictable tariffs. The company's first-quarter report was generally positive, but its consulting segment did experience some headwinds. Customers continued to spend cautiously on discretionary projects, and the DOGE team's spending cuts led to some contract cancellations.
The growth of IBM's generative AI business, which is mostly consulting plus some software, slowed in the first quarter. The company added $1 billion worth of new generative AI business, about half of what it added in the fourth quarter. Seasonality could be a factor, although clients may be pulling back on new projects due to the rising levels of macroeconomic uncertainty.
Despite these headwinds, IBM maintained its full-year guidance for revenue growth of at least 5% after adjusting for foreign exchange rate shifts, and free cash flow of around $13.5 billion. If the U.S. is pushed into a recession this year, that could cause IBM to miss those targets, but as it stands today, the company still expects to hit them.
Given that IBM has grown its dividend consistently for three decades through multiple crises, it is unlikely that management would resort to a dividend cut. Based on the new payment and the company's outstanding share count as of the end of the first quarter, IBM will distribute roughly 47% of its expected 2025 free cash flow through dividends over the next year. That gives IBM plenty of breathing room to maintain the payout, even if economic conditions take a turn for the worse.
A few things will work in IBM's favor this year. First, the company is set to launch its new z17 mainframe in June. The debuts of new mainframe systems generally trigger upgrade cycles that boost its infrastructure revenue. Further, given the tech sector's focus on AI, the z17 could drive additional AI consulting and software revenue.
Second, the mission-critical work IBM does for clients will be somewhat insulated from any economic slowdown. While clients may slash discretionary IT spending and halt new projects, there's a floor to how much IT spending they can cut without directly impacting their operations. Additionally, if the macro environment becomes more difficult, some clients may opt to pursue digital transformation projects designed to boost their efficiency and reduce costs. Strong demand for those types of projects could help offset slumping demand elsewhere in the business.
A reasonably priced dividend stock
With a safe dividend yield of 2.8% and trading at a forward price-to-free-cash-flow ratio of about 16.5, IBM stock looks like a solid value. It could fall short of its guidance if economic conditions worsen, and the stock would likely tumble if the broader stock market took a further dive. But for investors looking for a relatively safe stock amid a sea of uncertainty, IBM is a great choice.
