Dividend Investors: Don't Be Too Quick To Buy International Business Machines Corporation (NYSE:IBM) For Its Upcoming Dividend

International Business Machines Corporation (NYSE:IBM) stock is about to trade ex-dividend in four days. The ex-dividend date is usually set to be one business day before the record date which is the cut-off date on which you must be present on the company's books as a shareholder in order to receive the dividend. The ex-dividend date is an important date to be aware of as any purchase of the stock made on or after this date might mean a late settlement that doesn't show on the record date. Accordingly, International Business Machines investors that purchase the stock on or after the 9th of February will not receive the dividend, which will be paid on the 10th of March.

The company's next dividend payment will be US$1.65 per share. Last year, in total, the company distributed US$6.60 to shareholders. Looking at the last 12 months of distributions, International Business Machines has a trailing yield of approximately 4.8% on its current stock price of $136.94. 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 check whether the dividend payments are covered, and if earnings are growing.

See 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 a disturbingly high 334% of its profit as dividends last year, which makes us concerned there's something we don't fully understand in the business. 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. It paid out more than half (69%) of its free cash flow in the past year, which is within an average range for most companies.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and International Business Machines fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.

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

Have Earnings And Dividends Been Growing?

Companies with falling earnings are riskier for dividend shareholders. Investors love dividends, so if earnings fall and the dividend is reduced, expect a stock to be sold off heavily at the same time. With that in mind, we're discomforted by International Business Machines's 20% per annum decline in earnings in the past five years. When earnings per share fall, the maximum amount of dividends that can be paid also falls.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. In the last 10 years, International Business Machines has lifted its dividend by approximately 6.9% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. International Business Machines is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.

Final Takeaway

From a dividend perspective, should investors buy or avoid International Business Machines? It's never fun to see a company's earnings per share in retreat. Worse, International Business Machines's paying out a majority of its earnings and more than half its free cash flow. Positive cash flows are good news but it's not a good combination. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of International Business Machines.

So if you're still interested in International Business Machines despite it's poor dividend qualities, you should be well informed on some of the risks facing this stock. Be aware that International Business Machines is showing 4 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

If you're in the market for strong dividend payers, we recommend checking our selection of top dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.