Ring the bell because it’s that time again. We’re putting two iconic dividend payers in the ring for an old-school dividend smackdown. The fighters: Two old-school tech giants, Microsoft Corporation (NASDAQ:MSFT) and International Business Machines Corp. (NYSE:IBM).
At first this might seem like a bout between two washed up has-beens. Both of these companies are ancient by tech company standards, and neither gets the headlines they used to. Yet longevity in the tech space is something to take seriously. If you’re able to survive decades in an industry known for rapid upheaval, you’re clearly doing something right.
Yet no fighter’s streak lasts forever. Even Mike Tyson eventually got knocked out, by underdog Buster Douglas. And in our match today, one company is well into a bona fide comeback, whereas the other is at risk of getting knocked out … permanently.
So with that, let’s go ringside in this battle between IBM stock and MSFT stock starting with the current dividend yield.
In a world where the S&P 500 yields just 1.9%, both Microsoft and IBM have to be considered relatively high-yield stocks. Microsoft stock sports a dividend yield of 2.4% and IBM 3.2%. So, in a head-to-head match up, IBM is clearly the higher yielder.
Furthermore, at first glance, IBM’s dividend would appear to be more sustainable. IBM stock is only paying out 44% of current earnings per share, whereas MSFT is payout out a much higher 69%.
So, in round one of this dividend smackdown, we have a clear winner: Big Blue.
Dividend Yield Winner: IBM
For round two, let’s take a look at dividend growth. After all, the current dividend yield only gets you so far, as a dividend stock without a growing dividend is essentially just a riskier version of a bond. A good dividend stock should have both a respectable current yield and a dividend growth rate well in excess of inflation.
Click to Enlarge Well, both of our fighters qualify here. Microsoft has raised its dividend for 13 consecutive years, and IBM has raised its dividend for 17.
Over the past 10 years, both stocks have been aggressive dividend raisers, but one has clearly taken the lead. Microsoft has raised its payout by a cumulative 300%, which would crush nearly any competitor other than IBM. Big Blue has managed to raise its dividend a cumulative 400%.
Over the past five years, MSFT stock has the edge, beating out IBM stock by a cumulative 125% to 87%. But in round two, I’m going to have to give the edge to IBM.
Dividend Growth Winner: IBM
Thus far, it has been a lopsided contest, with IBM taking the first two rounds. So is the match over? Or is Microsoft about to mount a comeback worthy of Rocky Balboa?
Let’s take a look.
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 Amazon.com, 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.