Is IBM’s dividend safe?

The share price for IBM (IBM Stock Quote, Chart, News NYSE:IBM) hasn’t taken off this year like the rest of the tech sector and the reason is obvious, says portfolio manager David Baskin. Unlike your Amazons and your Googles, IBM isn’t a growth stock anymore.

“IBM, of course, is the grandfather of all the technology companies in the United States and one that, I think you could argue, has not adapted quickly to the digital age as now more famous and much larger competitors such as Apple and Google and Facebook and so forth,” said Baskin, president of Baskin Wealth Management, speaking on BNN Bloomberg on Tuesday.

“In fact, IBM has suffered through declining sales in the last few years. And while the company is still profitable and still earns its dividend it's certainly not a growth stock at this point,” he said.

“That being said, it does pay a dividend which is around 5 per cent, and probably that dividend is fairly durable,” Baskin said.

Last week, IBM surprised with its second quarter financials which saw the company earn $2.18 per share on revenue of $18.12 billion. Analysts were expecting $2.07 per share on a $17.72 billion top line. Those numbers were down year-over-year, however, with revenue for the quarter down five per cent and earnings down a full 31 per cent.

IBM management pointed to the positive in its quarterly comments, where its Cloud & Data Platforms business was up 29 per cent year-over-year, led by enterprise software company Red Hat, purchased in 2018. And while IBM’s share of the still-growing cloud computing sector pales in comparison to juggernauts Amazon and Microsoft, the company sees growth in its hybrid cloud platform, with new CEO Arvind Krishna calling its cloud platform “a catalyst for innovation.”

IBM’s share price has stalled in its recovery from the general market pullback earlier this year. The stock is currently down six per cent for the year, while over the past three years IBM is down 13 per cent — that’s in contrast to the S&P North American Technology Sector Index which over that same three-year stretch is up 91 per cent.

IBM finished its second quarter with $14.3 billion in cash on hand, up $5.2 billion from the end of 2019, with debt including global financing debt of $64.7 billion.

“Our prudent financial management in these turbulent times enabled us to expand our gross profit margin, generate strong free cash flow and improve our liquidity position,” said James Kavanaugh, IBM senior vice president and chief financial officer in the second quarter press release. “We have the financial flexibility to continue to invest in our business and return value to our shareholders through our dividend policy.”

Calling IBM’s second quarter “better than feared,” Morgan Stanley analyst Katy Huberty said the company is nonetheless likely to experience a slower recovery over the second half of 2020.

“The weaker economy presents an opportunity to reset earnings expectations, leaving room for future growth investments and diluting the long-standing bear case on the stock,” said Huberty, who raised her target for IBM from $111 to $128 with an “Equal Weight” rating.