International Business Machines Corporation (NYSE:IBM) Is About To Go Ex-Dividend, And It Pays A 4.5% Yield

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Regular readers will know that we love our dividends at Simply Wall St, which is why it’s exciting to see International Business Machines Corporation (NYSE:IBM) is about to trade ex-dividend in the next 4 days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company’s books to be eligible for a dividend payment. The ex-dividend date is important as the process of settlement involves two full business days. So if you miss that date, you would not show up on the company’s books on the record date. Accordingly, International Business Machines investors that purchase the stock on or after the 9th of November will not receive the dividend, which will be paid on the 9th of December.

The company’s next dividend payment will be US$1.66 per share, on the back of last year when the company paid a total of US$6.64 to shareholders. Based on the last year’s worth of payments, International Business Machines has a trailing yield of 4.5% on the current stock price of $147.9. Dividends are a major contributor to investment returns for long term holders, but only if the dividend continues to be paid. As a result, readers should always check whether International Business Machines has been able to grow its dividends, or if the dividend might be cut.

See our latest analysis for International Business Machines

If a company pays out more in dividends than it earned, then the dividend might become unsustainable – hardly an ideal situation. It paid out 85% of its earnings as dividends last year, which is not unreasonable, but limits reinvestment in the business and leaves the dividend vulnerable to a business downturn. It could become a concern if earnings started to decline. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Dividends consumed 52% of the company’s free cash flow last year, which is within a normal range for most dividend-paying organisations.

It’s encouraging to see that the dividend is covered by both profit and cash flow. This generally suggests the dividend is sustainable, as long as earnings don’t drop precipitously.

Click here to see the company’s payout ratio, plus analyst estimates of its future dividends.

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Have Earnings And Dividends Been Growing?

Companies with consistently growing earnings per share generally make the best dividend stocks, as they usually find it easier to grow dividends per share. If earnings decline and the company is forced to cut its dividend, investors could watch the value of their investment go up in smoke. This is why it’s a relief to see International Business Machines earnings per share are up 4.7% per annum over the last five years. A high payout ratio of 85% generally happens when a company can’t find better uses for the cash. Combined with slim earnings growth in the past few years, International Business Machines could be signalling that its future growth prospects are thin.

Another key way to measure a company’s dividend prospects is by measuring its historical rate of dividend growth. Since the start of our data, 10 years ago, International Business Machines has lifted its dividend by approximately 6.9% a year on average. It’s encouraging to see the company lifting dividends while earnings are growing, suggesting at least some corporate interest in rewarding shareholders.

To Sum It Up

Should investors buy International Business Machines for the upcoming dividend? Earnings per share growth has been unremarkable, and while the company is paying out a majority of its earnings and cash flow in the form of dividends, the dividend payments don’t appear excessive. All things considered, we are not particularly enthused about International Business Machines from a dividend perspective.

So if you want to do more digging on International Business Machines, you’ll find it worthwhile knowing the risks that this stock faces. In terms of investment risks, we’ve identified 1 warning sign with International Business Machines and understanding them should be part of your investment process.

Generally, we wouldn’t recommend just buying the first dividend stock you see. Here’s a curated list of interesting stocks that are strong dividend payers.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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