IBM shares slumped 10% on Friday following the company's fourth-quarter earnings report. IBM's organic sales fell 8%, marking the fourth straight quarterly decline, but investors were most concerned by a 7% drop in the Cloud & Cognitive Software segment. This high-margin division accounts for roughly 50% of IBM's gross profit and will become an even larger driver once the firm spins off its infrastructure services segment (25% of revenue) in late 2021. Cloud & Cognitive Software holds the foundational pieces of IBM's hybrid cloud and artificial intelligence (AI) strategy, which new CEO Arvind Krishna has bet the company's future on. Please see our October 2020 note for a detailed review of IBM's strategy.

In December, International Paper announced plans to spin off the firm's printing papers business into a standalone, publicly traded company. The spin-off is expected to be completed late in the third quarter of 2021, at which time shares in the spin-off will be distributed to International Paper investors. The transaction is expected to be tax-free for U.S. federal tax purposes. Printing papers account for close to 20% of International Paper's cash flow. As a result, International Paper expects to reduce its current dividend by 15% to 20% in proportion to the cash generated by the spin-off once the transaction closes. This will keep International Paper's payout ratio aligned with management's target of 40% to 50% of free cash flow.

The defensive utility sector has trailed the S&P 500 by more than 15% over the past year. Shares of Con Edison have been especially weak, slumping around 15% since mid-November to reach a level not far from their pandemic lows seen last March. With Con Edison's valuation looking unusually cheap compared to historical norms, some investors may be wondering if the stock is a value trap and could be at risk of changing its dividend policy. Management typically declares (and raises) Con Edison's first-quarter dividend on the third Thursday of January, so we will get an answer on the dividend as soon as tomorrow. Unless management expects a material deterioration in New York's regulatory framework, which seems unlikely at this [...]

Owens & Minor stunned many investors in October 2018 when it announced a 71% dividend cut. Shares fell more than 40% on the news as the medical supplies distributor broke its streak of paying uninterrupted dividends since 1977. The company's core customers (hospitals) were putting increased price pressure on the firm in an effort to cut costs, and several large customers chose not to renew their distribution contracts. As growth in its legacy business struggled, management attempted to stabilize earnings by making two large acquisitions in faster-growing segments, straining Owens & Minor's balance sheet and liquidity. Cutting the dividend gave Owens & Minor more breathing room to service its significant debt load while continuing to adapt its business model for [...]