We recently compiled a list of the 20 Worst Dividend Aristocrat Stocks According to Analysts. In this article, we are going to take a look at where International Business Machines Corporation (NYSE:IBM) stands against the other dividend aristocrat stocks.
Dividend aristocrats are companies that have raised their dividend payouts for at least 25 consecutive years. Achieving and maintaining a dividend streak this long is a tough nut to crack. That is why, among the approximately 6,000 stocks listed on the NYSE and NASDAQ, only around 67 companies have earned the distinction of being called dividend aristocrats. This strong dividend growth track records imply that these companies were financially stable enough to sustain their payouts during two significant financial crises: the Great Financial Crisis of 2008 and the COVID-19 pandemic. Besides this, these companies have also shown strong performance relative to the broader market over the years. The Dividend Aristocrat Index has outperformed the wider market with lower volatility since its inception in 2005. Recently we covered the list of the 25 Best Dividend Aristocrats to Buy according to Wall Street analysts.
Analysts have closely observed the performance of dividend aristocrats in the past and in recent times. In a January 2019 blog post titled ‘Dividend Growth Strategies and Downside Protection’, Phillip Brzenk, global head of multi-asset indexes, analyzed how dividend growth strategies perform, particularly in times when the market experiences declines. He said that since the end of 1989, there have been six calendar years when the broader market posted negative performance. Interestingly, in each of these years, the Dividend Aristocrats outperformed the broader equity benchmark by an average of 13.28%. Moreover, they managed to achieve a positive total return in three of those challenging years. He further said, the aristocrats outperformed the market in 53% of instances, with an average outperformance of 0.16%, when their performance was observed on a monthly basis.
As mentioned above, dividend growth stocks have performed better than the overall market. Since its inception in 2005 up until September 2023, the dividend aristocrats index achieved a total return of 10.35%, surpassing the broader market’s return of 9.54% during the same timeframe. Additionally, the dividend aristocrats exhibited lower volatility, at 15.35%, compared to the market’s 16.31%. This indicates that the prices of these stocks are more stable and less prone to frequent changes, demonstrating their relative resilience.
That said, analysts are now turning their attention to different aspects of dividend investing. For taxable investors, dividends can be less favorable compared to share repurchases. Additionally, focusing on dividends limits diversification since around 60% of U.S. stocks and 40% of international stocks do not pay dividends. As a result, portfolios that emphasize dividends are significantly less diversified than those that do not consider dividends in their design. Less-diversified portfolios tend to be less efficient due to a higher potential range of returns without any corresponding increase in expected returns, assuming the exposure to common factors remains constant. Moreover, emphasizing dividends often leads to an overinvestment in U.S. equities, causing a home-country bias and further reducing diversification.
According to this analysis, dividends are a tax-efficient method for returning capital to shareholders. However, investors continue to favor these equities due to their solid performance and the reliable income they offer. Although dividend aristocrats are strong companies with consistent dividend growth, some are less favored by analysts due to factors like industry challenges, macroeconomic conditions, and specific business issues.
Our Methodology:
For our list, we scanned a list of the S&P 500 Dividend Aristocrats, companies that have raised their dividends for 25 consecutive years or more. We then ranked these stocks according to their average analyst ratings from Yahoo Finance, where a higher score signifies the worst rating. The “Recommendation Rating” is a way to assess stocks. It uses a scale from 1 to 5, with each number indicating a different recommendation:
1. Strong Buy
2. Buy
3. Hold
4. Underperform
5. Sell
From this ranking, we selected the stocks with scores of 3 or more.
A closeup of a woman’s hands typing rapidly on a laptop in a corporate office setting.
International Business Machines Corporation (NYSE:IBM)
Average Analyst Rating Score: 3.5
International Business Machines Corporation (NYSE:IBM) is a New York-based technology company that specializes in AI, automation, and hybrid cloud solutions. on April 30, the company declared a 0.6% hike in its quarterly dividend to $1.67 per share. This was the company’s 29th consecutive year of dividend growth. As of June 14, the stock has a dividend yield of 3.95%.
Though International Business Machines Corporation (NYSE:IBM) has raised its dividends for nearly three decades, its dividend growth has remained slow. Over the past five years, it has raised its dividends at an annual average rate of 1.9%. In terms of revenue growth, the company faces significant challenges in its different segments. For instance, in the first quarter of 2024, its consulting, financing, and infrastructure businesses reported declines on a year-over-year basis. This could cause a blow to the company’s overall revenue, considering its consulting business is a major competitive advantage for it. In addition, despite spending heavily on acquisitions, the company’s revenue growth has been disappointing. In 2019, it bought Red Hat for $34 billion, and last year, it spent approximately $6 billion to acquire nine companies. If the $6.4 billion deal for HashiCorp is finalized, it will be IBM’s latest addition to its portfolio.
Diamond Hill Capital also mentioned these business headwinds in its Q4 2023 investor letter:
“Other bottom contributors included our short positions in Garmin and International Business Machines Corporation (NYSE:IBM), as well as our long position in Chevron. IBM’s software and consulting businesses were solid in the quarter, helping drive revenue growth. But the company faces numerous fundamental headwinds in both these businesses, and we expect it will struggle to meet cash-flow guidance.”
One of the main reasons for this slow revenue growth is despite having a strong history with AI, the company hasn’t made this technology its core focus in the past. However, things have changed since 2020 when Arvind Krishna became the company’s CEO. Since then, AI played a role in driving IBM’s sales growth and the stock has surged by roughly 46%. Despite having a relatively strong balance sheet and steady cash flow generation, IBM faces challenges due to its debt position. The company’s debt grew by $3 billion since the end of 2023 to $59.5 billion in Q1 2024. Moreover, its debt-to-equity ratio comes in at 2.7, which raises concerns for income investors. Moreover, its payout ratio of 66.8% is also high.
International Business Machines Corporation (NYSE:IBM) shares reached an all-time of around $206 per share in 2013 and haven’t reached that level again. Although the stock nearly hit $200 earlier this year, it has since fallen back. Analysts have maintained a consensus Hold rating on the stock, which makes it one of the worst dividend aristocrat stocks on our list.
Insider Monkey’s database of 920 hedge funds at the end of Q1 2024 indicated that 49 funds held stakes in International Business Machines Corporation (NYSE:IBM), down from 50 in the previous quarter. These stakes are valued at over $1 billion.
Overall IBM ranks 10th on our list of the worst dividend aristocrat stocks to buy. You can visit 20 Worst Dividend Aristocrat Stocks According to Analysts to see the other dividend aristocrat stocks that are on hedge funds’ radar. While we acknowledge the potential of IBM as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as IBM but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.