Should Income Investors Look At International Business Machines Corporation (NYSE:IBM) Before Its Ex-Dividend?

Some investors rely on dividends for growing their wealth, and if you're one of those dividend sleuths, you might be intrigued to know that International Business Machines Corporation (NYSE:IBM) is about to go ex-dividend in just 4 days. Investors can purchase shares before the 9th of November in order to be eligible for this dividend, which will be paid on the 10th of December.

International Business Machines's next dividend payment will be US$1.63 per share, and in the last 12 months, the company paid a total of US$6.52 per share. Calculating the last year's worth of payments shows that International Business Machines has a trailing yield of 5.7% on the current share price of $114.16. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to investigate whether International Business Machines can afford its dividend, and if the dividend could grow.

Check out 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. International Business Machines paid out more than half (73%) of its earnings last year, which is a regular payout ratio for most companies. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Thankfully its dividend payments took up just 46% of the free cash flow it generated, which is a comfortable payout ratio.

It's positive to see that International Business Machines's dividend is covered by both profits and cash flow, since this is generally a sign that the dividend is sustainable, and a lower payout ratio usually suggests a greater margin of safety before the dividend gets cut.

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

Have Earnings And Dividends Been Growing?

Businesses with shrinking earnings are tricky from a dividend perspective. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. International Business Machines's earnings per share have fallen at approximately 11% a year over the previous five years. Ultimately, when earnings per share decline, the size of the pie from which dividends can be paid, shrinks.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, 10 years ago, International Business Machines has lifted its dividend by approximately 11% a year on average. That's interesting, but the combination of a growing dividend despite declining earnings can typically only be achieved by paying out more of the company's profits. This can be valuable for shareholders, but it can't go on forever.

To Sum It Up

Has International Business Machines got what it takes to maintain its dividend payments? We're not enthused by the declining earnings per share, although at least the company's payout ratio is within a reasonable range, meaning it may not be at imminent risk of a dividend cut. In summary, it's hard to get excited about International Business Machines from a dividend perspective.

However if you're still interested in International Business Machines as a potential investment, you should definitely consider some of the risks involved with International Business Machines. For example, we've found 1 warning sign for International Business Machines that we recommend you consider before investing in the business.

If you're in the market for dividend stocks, we recommend checking our list of top dividend stocks with a greater than 2% yield and an upcoming dividend.

This article by Simply Wall St is general in nature. 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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