When it comes to dividend investing, International Business Machines Corp. (NYSE:IBM) doesn’t usually come to mind. But over the last year, IBM stock has dropped as much as 27% to a 52-week low in early February. For a stock that pays out a dividend, a large drop in its price per share is going to boost its dividend yield. That’s the case for IBM stock, which now boasts an attractive dividend yield of 3.5%.
IBM’s dividend yield makes it one of the most attractive stocks in the tech sector and it is a compelling choice for any income investor’s portfolio. Here are three reasons why IBM is a top dividend stock.
Of course, to keep paying out a dividend, a company needs to keep growing. Unfortunately for IBM, growth has hit a bit of a rut. IBM has now posted 15 quarters in a row of year-over-year declines. But after years of not really having any direction, IBM is reinventing itself, which should propel future growth.
In particular, IBM is betting big on cloud computing and data analytics as the next frontiers for growth.
In 2014, IBM invested $1.0 billion to create a new business unit dedicated to “Watson,” the company’s artificial intelligence supercomputer. Watson is able to analyze massive amounts of data, learn from the results, and gain intelligent insights. The supercomputer processes information in a similar manner to how people think.
Morgan Stanley analyst Katy Huberty believes Watson is going to be a big catalyst for IBM stock. Huberty reiterated an “Overweight” rating on IBM stock and increased her price target to $168.00 from $140.00. But she believes that if the Watson business takes off, IBM stock could soar to $195.00. (Source: “IBM’s Watson Is Significant, Says Morgan Stanley, Investors Just Have to Get It,” Barron’s, March 31, 2016.) That implies an upside in IBM stock of about 30% from today’s stock price.
IBM is going to use Watson to jump into the healthcare industry, which is poised to be a boon for IBM stock. IBM has already partnered with several companies, such as Johnson & Johnson (NYSE:JNJ), Medtronic, Inc. (NYSE:MDT), and SoftBank Group Corp, among many others, to provide data analytics services. According to research firm IQ4I Research and Consultancy Pvt., the global healthcare analytics markets will be worth $20.8 billion by 2020. (Source: “Healthcare Analytics Global Market and Estimated to be Worth $20.8 Billion by 2020,” PR.com, September 22, 2014.)
Data analytics is just one aspect of IBM’s “strategic imperatives” business segment, which also includes cloud, mobile, social, and security services. IBM is focusing heavily on this business for the future of its growth and it looks very promising.
It’s hard to believe, but IBM has been around for more than 100 years. Founded in 1911 as the Computing-Tabulating-Recording Company through the consolidation of four smaller companies, IBM started with 1,300 employees and manufactured machinery, such as commercial scales, industrial time recorders, meat and cheese cutters, tabulators, and punch cards.
A couple of years later, IBM issued its first dividend but stopped issuing it for a couple of years. In 1916, the company began reissuing dividends and has been paying them out to shareholders ever since.
IBM may not be a dividend aristocrat, but its current streak of raising payouts is pretty impressive. The company has increased its dividend every year since 1996, and over the last decade, IBM has increased its dividend 18.7% on average per year.
When a company decides to repurchase its own shares, it’s usually a sign that management thinks the shares are selling on the cheap. In 2014, IBM announced a $4.0-billion share buyback program in addition to the $2.4 billion leftover from a $5.0-billion stock repurchase approved the previous year.
IBM’s share buyback will have a positive effect on earnings per share as it reduces the public float of shares, which is good for shareholders.
The Bottom Line on IBM Stock
With lots of growth still ahead, solid dividend growth, and management buying back shares, income investors may want to take a look at IBM stock.