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Stock Strategist

IBM Is Making Mostly Smart Moves, but the Cloud Is a Looming Threat

Dividend increase was higher than we expected, says Morningstar's Peter Wahlstrom.

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 IBM (IBM) has announced a 15.8% increase to its quarterly dividend to $1.10 from $0.95, which was slightly above our expectation of a 10% hike. With its 19th annual increase, IBM's payout ratio ticks slightly above 25% and should bring the annual dividend payment to nearly $4.4 billion. There is no change to our $212 fair value estimate or wide moat rating based on the news, and as the firm prepares for its investor day in mid-May, we continue to believe that management's capital allocation strategy will (even if indirectly) remain in focus.

As IBM becomes a more specialized, software-based service provider, we generally agree with the strategic bets that the firm is making, like its smarter planet, growth markets, business analytics, and cloud/data center initiatives. However, IBM is generating about $17 billion in free cash annually but spending $6 billion and $4 billion on research and development and capital expenditures, respectively, and we believe that many investors are hoping for these investments to result in more than low-single-digit top-line growth over the medium term.

Peter Wahlstrom has a position in the following securities mentioned above: CSCO. Find out about Morningstar’s editorial policies.

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