International Business Machines Corp. (NYSE: IBM) finally has delivered what we have waited for, although we still think more needs to be done here. Big Blue has just announced that its board of directors has declared a regular quarterly cash dividend of $0.95 per common share. The dividend hike represents a gain of $0.10 per quarter, or 12% higher than before. News of a share buyback going up to $11.2 billion in total is also being released. The dividend hike and the share buyback plans sound great on the surface. We have just identified over and over why IBM needs a better dividend policy.

This is the 18th year in a row that IBM has increased its quarterly cash dividend, and the 10th year in a row of double-digit percentage increases. IBM has increased its dividend by more than 600 percent since the beginning of 2000. IBM has now paid consecutive quarterly dividends every year since 1916. The dividend is payable June 10, 2013, to stockholders of record May 10, 2013.

IBM’s new share buyback plan is for $5 billion in additional funds, which is actually in addition to approximately $6.2 billion remaining at the end of March from a prior authorization. IBM will have approximately $11.2 billion for its stock repurchase program. You can expect more share buybacks yet again down the road. The company said, “IBM expects to request additional share repurchase authorization at the October 2013 board meeting. IBM has reduced its share count by a third since the beginning of 2000.”

Our problem is not the share buybacks. Big Blue has to keep buying back stock to help it get to that earnings of at least $20.00 per share by 2015. IBM has now returned over $150 billion to shareholders in the form of dividends and share repurchases.

Our take was that we wanted to see at least $1.00 per share. Realistically, we wanted even more. The issue is that IBM is a Dow Jones Industrial Average component and it underyields compared to peers. The dividend from IBM with a $199 stock price will now be 1.90% at the new higher rate. This lags Microsoft Corp. (NASDAQ: MSFT) at 2.9%, lags Intel Corp. (NASDAQ: INTC) at 3.8%, and even lags the troubled Hewlett-Packard Co. (NYSE: HPQ) at 2.6%.

IBM even underyields Apple Inc. (NASDAQ: AAPL) with its 2.9% yield and Cisco Systems Inc. (NASDAQ: CSCO) with its 3.3% yield. Both Apple and Cisco are very new to the dividend game.

With the Thomson Reuters consensus earnings estimates at $16.67 EPS for 2013 and $18.35 EPS for 2014, we are just underwhelmed. The dividend return is a better reward than a share buyback because the dividend is a commitment to years and years of steady predictable earnings. This represents only a 23% payout ratio for 2013 and only about a 21% payout ratio against 2013 earnings. IBM also has close to $141 billion or so in services backlogs for its future orders.

IBM shares are now up 0.4% at $199.90 after the news. Imagine if IBM really went for a peer-driven dividend yield rather than lagging so much. Big Blue just might bring in many more Warren Buffett chasers into the stock.

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