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International Business Machines Corporation (NYSE:IBM) stock is about to trade ex-dividend in two days. The ex-dividend date is one business day before the record date, which is the cut-off date for shareholders to be present on the company's books to be eligible for a dividend payment. It is important to be aware of the ex-dividend date because any trade on the stock needs to have been settled on or before the record date. Accordingly, International Business Machines investors that purchase the stock on or after the 9th of May will not receive the dividend, which will be paid on the 10th of June.
The company's next dividend payment will be US$1.65 per share, on the back of last year when the company paid a total of US$6.60 to shareholders. Last year's total dividend payments show that International Business Machines has a trailing yield of 4.9% on the current share price of $135.92. We love seeing companies pay a dividend, but it's also important to be sure that laying the golden eggs isn't going to kill our golden goose! We need to see whether the dividend is covered by earnings and if it's growing.
View 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 distributed an unsustainably high 119% of its profit as dividends to shareholders last year. Without extenuating circumstances, we'd consider the dividend at risk of a cut. Yet cash flows are even more important than profits for assessing a dividend, so we need to see if the company generated enough cash to pay its distribution. Over the last year it paid out 69% of its free cash flow as dividends, within the usual range for most companies.
It's good to see that while International Business Machines's dividends were not covered by profits, at least they are affordable from a cash perspective. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. 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. If earnings fall far enough, the company could be forced to cut its dividend. International Business Machines's earnings per share have fallen at approximately 15% a year over the previous five years. Such a sharp decline casts doubt on the future sustainability of the dividend.