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Dividend Smackdown: IBM Stock vs. MSFT Stock

We look at dividend yield, income growth and prospects for big tech juggernauts IBM and MSFT

Microsoft (MSFT)

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Both companies are undergoing transformations of sorts.

With sales of personal computers in a multi-year slump, Microsoft is eager to move past the PC era to become a “cloud and services” company. Likewise, IBM is transitioning away from its traditional business of selling hardware with long-term service contracts to companies and is instead focusing on growth in cloud services and analytics. Interestingly, this means that these two companies — which have mostly operated in different  realms in their respective histories — are now increasingly direct competitors.

The transition to the cloud has been disruptive to both companies, but it’s been particularly brutal for IBM. IBM has seen its revenues drop for 19 consecutive quarters. That’s just shy of five complete years of falling year-over-year sales. At this point, you would expect to see sales grow, if only because the comparable sales from the previous year were so horrendously bad. Yet IBM’s sales continue to sag.

So, if revenues are falling … where is IBM getting the cash to fund its dividend?

Unfortunately, by borrowing it. IBM’s long-term debt is up by 50% since 2011. It’s also aggressively repurchasing shares, and every share that is buys back is a share for which it doesn’t have to pay a dividend. While that works as a short-term solution, it’s hardly a long-term plan. So unless sales recover in a hurry, IBM stock is going to be on the ropes.

Microsoft has had some revenue issues of its own, as lack of PC sales growth has affected licensing revenues from Windows and Office. But Microsoft’s cloud business has been unstopable, and Microsoft is now considered by many to be second only to, Inc.’s (NASDAQ:AMZN) AWS as a cloud services provider.

Future Prospects Winner: MSFT

Bottom Line: MSFT Stock Wins

Microsoft comes from behind and delivers a devastating blow to IBM, winning the final round … and the match.

IBM looks better on paper, with a higher dividend yield and higher dividend growth over the past 10 years. But IBM’s business is suffering, whereas Microsoft has already essentially done the hard work of reinventing itself.

Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas.

Article printed from InvestorPlace Media,

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