around during Big Blue's transformation.International Business Machines (NYSE:IBM) is still struggling to reach the point where its growth businesses fully offset decreases in legacy revenue. The first quarter, results for which IBM reported last week, marked the 20th consecutive quarterly revenue decline.
IBM has also extended another streak, one that should make investors happy. The company announced that it was boosting its quarterly dividend payment to $1.50 per share, a 7.1% increase that brings the dividend yield up to about 3.7%. IBM has now increased its dividend annually for 22 years in a row, and it's paid a quarterly dividend uninterrupted since 1916. Even with dividend growth slowing, IBM is a solid dividend stock that just got even better.
Image source: IBM.
Slowing dividend growth
On a percentage basis, the latest dividend increase is the smallest in over a decade. IBM's earnings have declined in each of the past three years, so this shouldn't come as a surprise.| Year | Dividend Increase |
|---|---|
| 2017 | 7.1% |
| 2016 | 7.7% |
| 2015 | 18.2% |
| 2014 | 15.8% |
| 2013 | 11.8% |
| 2012 | 13.3% |
| 2011 | 15.4% |
| 2010 | 18.2% |
Data source: IBM.
The new quarterly dividend, which comes out to $6 per share annually, will eat up 43.5% of IBM's adjusted earnings in 2017, assuming the company hits its guidance. IBM expects to produce adjusted EPS of at least $13.80 this year, up slightly from 2016.The payout ratio is a bit higher if free cash flow is used instead of earnings. IBM expects its free cash flow this year to be roughly flat compared with 2016, which would put it at about $11.6 billion, excluding receivables from its financing business. Based on the current share count, IBM will pay out about $5.65 billion in dividends during 2017, just shy of half its expected free cash flow.
IBM's payout ratio has soared over the past 20 years, with a big jump in the past few years driven by slumping earnings. The company paid out less than 25% of its earnings to shareholders for much of the past two decades, allowing the dividend to grow faster than earnings. That will be more difficult going forward.
IBM Payout Ratio (Annual) data by YCharts.
Small dividend increases will likely be the norm unless IBM can return to robust earnings growth. Adjusted earnings are expected to grow slightly this year, but it will likely take a return to revenue growth for earnings to really take off. Still, with a 3.7% dividend yield, even sluggish dividend growth makes for an attractive dividend stock.Take advantage of market pessimism
Shares of IBM plunged after it missed first-quarter revenue estimates, in part due to the timing of some major service deals. The story at IBM hasn't really changed, though, and now the higher dividend makes the stock even more attractive.IBM's return to revenue growth is still pending, and investors are rightfully hesitant to invest in a company that has seen sales slump for five years running. But IBM's growth businesses are expanding at a double-digit pace. Its cloud business generated nearly $14 billion of revenue in 2016, and cloud-as-a-service is at an $8.6 billion annual run rate, up 61% over the past year.
With $13.80 in adjusted EPS expected this year, IBM stock trades for less than 12 times forward earnings. That's too low, in my opinion, especially considering the 3.7% dividend yield. IBM still needs to prove that its transformation can produce sustained earnings growth, and the market is unlikely to give the company credit for its turnaround until revenue starts growing again. But if you wait for the pessimism to subside, you'll miss out on a great dividend stock selling at a discount.
Timothy Green owns shares of IBM. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
NuVasive Straightens Up With Solid Growth
The spinal surgery specialist sees product launches accelerating its momentum this year.
Coming into Tuesday's first-quarter financial report, NuVasive investors hoped to see solid gains in sales and earnings, and the company almost exactly matched their expectations. Moreover, the medical device maker sees product launches this year that could help it grow even faster in the future. Let's look more closely at NuVasive for more clues on how its quarter went and what investors can expect for the rest of the year and beyond.
Image source: NuVasive.
NuVasive moves forward
NuVasive's first-quarter results didn't satisfy everyone, but they were still solid. Revenue was up 16% to $250 million, which was only slightly below the $251 million in sales that investors were expecting to see. Adjusted net income rose a healthier 16% to $20 million, and that worked out to $0.38 per share, exactly matching the consensus forecast among those following the stock.A closer look at NuVasive's results shows some cross-currents within the report. Adjusted gross margin fell nearly two percentage points to 75.3%, reflecting higher costs from the recently acquired Biotronic NeuroNetwork business. However, GAAP operating expenses as a percentage of revenue dropped three percentage points to just over 66%, and that contributed greatly to NuVasive's favorable bottom-line performance. NuVasive has worked hard to maximize efficiency and reduce unnecessary costs, and those efforts are showing up in its financial results. Also, a dramatic decline in the amount of money spent on business transition costs helped support NuVasive's profits.
CEO Greg Lucier did a good job of putting the results into a broader perspective. "NuVasive is off to a solid start to the year, with our international business exceeding our expectations," Lucier said, "and we saw momentum building in our U.S. business as we exited the quarter." The CEO also highlighted its focus on maximizing operational efficiency, and the growing influence of its in-house manufacturing facility also contributed to the good mood within the company.
What's coming next for NuVasive?
Things continue to look up for NuVasive in the near future, with an expansion in the scope of its business driving excitement among investors. As Lucier said, "With several innovative product and systems launches planned for 2017, including LessRay designed for radiation reduction, RELINE Trauma system, expandable cages, and UNYTE system for complex fractures, we anticipate strong revenue acceleration for the balance of the year."Also helping NuVasive's growth plans will be greater borrowing capacity. The company amended its line of credit to give it an extra $350 million in borrowing capacity, raising the maximum to $500 million. However, one thing that investors will want to keep an eye on NuVasive's interest expense, which rose to $9.8 million this quarter from $8.5 million in the year-ago quarter. If interest rates rise from here, then those costs could continue to increase going forward.
However, some will be disappointed with NuVasive's guidance for 2017. The company simply reiterated its past forecasts, with expectations for $1.065 billion in sales and adjusted earnings of $2 per share. Those figures represent 11% to 12% top-line growth and a 20% rise in earnings per share from 2016 levels, showing ongoing growth trends that look favorable.
NuVasive investors weren't satisfied with the report, and the stock dropped 5% in after-hours trading following the announcement. Once future product releases start to have an impact, however, NuVasive's fundamentals are strong enough that growth could easily accelerate from here and renew more optimistic views for the spinal surgery specialist going forward.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends NuVasive. The Motley Fool has a disclosure policy.
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