Tale of the tape
International Business Machines Corp. (NYSE:IBM) will be a 34-year veteran of the Dow by the end of next month. Based in the suburbs north of New York City, IBM has been producing cutting-edge technology for over a century, which gives it real claim to the title of “World’s Oldest Tech Company.” IBM employs over 430,000 people, but it’s remarkably nimble for such a massive company. “Nonstrategic” parts of International Business Machines Corp. (NYSE:IBM)’s business worth a total of $15 billion in annual revenue have been divested over the past decade, and its three major new initiatives (Smarter Planet, data analytics, and cloud services) all enjoyed double-digit revenue growth in 2012. Due to the Dow’s price-weighting system, IBM is its single most important component — a move in International Business Machines Corp. (NYSE:IBM) stock prices will have several times the impact of a move in nearly every other stock on the Dow.
AT&T Inc. (NYSE:T) has been part of the Dow for over 13 years under its new corporate identity, but the original telecom has been a component in one form or another, without interruption, for 74 years. Like International Business Machines Corp. (NYSE:IBM), AT&T Inc. (NYSE:T) was one of the earlier Dow components, but was removed during the tumultuous Roaring ’20s (IBM actually lost its original spot on the Dow to AT&T Inc. (NYSE:T) in 1939 when the latter rejoined). Although AT&T is now primarily known as a wireless service provider (it has 107 million wireless subscribers), the company also provides broadband access, cable television subscriptions, and other connectivity services. All told, AT&T Inc. (NYSE:T)’s Internet backbone carries an estimated 33 petabytes of data each day. That’s over 15 million hours of high-definition streaming video!
| Statistic | IBM | AT&T |
|---|---|---|
| Market cap | $226.7 billion | $201.0 billion |
| P/E Ratio | 14.1 | 29.1 |
| Trailing 12-month profit margin | 16.1% | 5.8% |
| TTM free cash flow margin* | 15.0% | 15.8% |
| Five-year total return | 77.9% | 25.9% |
Source: Morningstar and YCharts.
* Free cash flow margin is free cash flow divided by revenue for the trailing 12 months.
Although International Business Machines Corp. (NYSE:IBM) squeaks ahead on market cap and profit margin while posting a far better total return for the past five years, AT&T Inc. (NYSE:T) is no slouch on free cash flow, which is an important consideration for dividend sustainability. Which of these two old-guard tech purveyors will triumph today?
Round one: endurance
Both IBM and AT&T have a long history of dividends. IBM began paying dividends all the way back in 1913, and has been making quarterly distributions since 1916, for a 97-year streak. However, AT&T’s dividend history dates all the way back to 1893, for an uninterrupted streak of 120 years. Sorry, International Business Machines Corp. (NYSE:IBM). This is one contest you joined too late.
Round two: stability
Paying dividends is well and good, but how long have our two companies been increasing their dividends? The same dividend payout year after year can quickly fall behind a rising market, and there’s no better sign of a company’s financial stability than a rising payout in a weak market (as long as it’s sustainable, of course).
International Business Machines Corp. (NYSE:IBM) suffered a tough time in the early 1990s as its commitment to competing for PC market share eroded profitability. The company had to lower dividends as a result, which means that dividend growth has only been under way since 1996. AT&T Inc. (NYSE:T), on the other hand, has been raising its payouts since 1959, following an extended streak of stable dividends.
Round three: power
It’s not that hard to commit to paying back shareholders, but are these payments enticing, or merely tokens? Let’s take a look at how both companies have maintained their dividend yields over time as their businesses and share prices have grown:
IBM Dividend Yield data by YCharts
