International Business Machines (NYSE:IBM), or IBM, can be thought of as the original technology company. Originally started in the early 1900s as the Computing-Tabulating-Recording Company, the company grew quickly on the back of its most important product -- the printing tabulator. With legendary CEO Thomas Watson at the helm, the company quickly became the go-to solution for computing-based devices.
The company today is much different from the one of years past. The printing tabulators have been replaced by cloud and enterprise computing solutions. In that time, IBM has become a massive company -- both in terms of market capitalization and dividend payments. Over the last half decade, IBM has landed on income investors radar's due to a historically low-yield environment and generous capital return policies. Here are two things dividend investors need to know about IBM.
The company isn't growing, but it's more focused on margins
The big issue for IBM is growth, or more specifically -- the lack thereof. Matter of fact, the company has only averaged approximately 1% revenue growth per year from fiscal 2009 to fiscal 2013. In addition, the company recently sold off its x86 server business to Lenovo, a business that contributed nearly $5 billion to its top line. So look for continued headwinds to IBM's top line.
However, the company also stated that the businessline that was sold to Lenovo was break even on a pretax basis. Therefore, the company received nearly $2.3 billion -- $2 billion of cash; the remainder in Lenovo stock -- for a very low margin business. This helps income-oriented investors in two ways: First is the obvious cash infusion to pay its dividend; next, this helps the company in its stated goal to grow its EPS to $20 a share by 2015 through a focus on higher-margin businesses.
Dividends are only one way IBM is returning cash to shareholders
To reach its lofty $20 per share EPS goals, the company is focusing on reducing cost and lowering shares outstanding. Last year, the company increased its share buyback program by an additional $15 billion. In addition, it is widely expected the company plans to increase its buyback total once again in its 2014 October board meeting. The chart below gives you some context on the importance of IBM's buybacks:
As you can see, over the last four years the company has given back more cash to shareholders via its share buyback program than its dividend. During that period, IBM has returned over $80 billion dollars in total.
The company has repurchased nearly $64 billion in stock -- or nearly 80% of its returned cash -- in the last five years. And by undertaking this large buyback program, the company has reduced its shares outstanding by nearly 18% -- an impressive feat indeed.
This helps income investors two ways. First, with fewer shares outstanding, the company is able to raise its dividend per share payouts higher with an overall smaller cash outlay because fewer shares are outstanding. That's also true for earnings; that's how a company with very low revenue growth can continue to enrich shareholders.
For example, the company's net income from fiscal 2009 to 2013 increased 23% by going from $13.4 billion to $16.5 billion. However, the company's earnings per share increased nearly 50% during that period going from $10.12 to $15.06.
Going back at the chart, the dividend per share story is even better. Although the company only grew its total dividends paid by 42% from $2.86 billion in 2009 to $4.06 billion in 2013, the dividend per share increase soared over 70% due to its huge buyback.
The story of IBM has been one of growth versus shareholder-friendly management. On one hand, the company seems to be struggling to grow that top line; eventually, shareholders will demand more growth from the company. As is, the company faces a transition of sorts as it transitions to the cloud and higher-margin businesses.
With that being said, you'd be hard-pressed to find a company with more shareholder friendly policies in regards to returning capital -- and that's why IBM should be on income investors' radars.
Jamal Carnette 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.