Cash, debt, and cash flows
As of 4Q14, IBM (IBM) held $8.5 billion in total cash and marketable securities. Its total debt stood at $36.2 billion, more than 95% of which is long-term debt. In 2014, IBM generated cash flow from operations (or CFO) and free cash flows (or FCF) of $16.8 billion and $12.69 billion, respectively.
We have already seen that IBM’s efforts in transforming as a cloud player are yet to show results. All its operating segments, as well as geographic regions, have reported falling revenues. Margins are on a decline too.
To gain diversified exposure to IBM, you can invest in the iShares US Technology ETF (IYW). IYW invests about 4.2% of its holdings in IBM.
Rising debt and falling cash flows
The previous chart shows year-over-year (or YoY) growth in total debt and free cash flow. Debt is increasing. In contrast, free cash flow (or FCF) is declining with each passing year. Also, although EPS is increasing, its growth is falling. Diluted operating non-GAAP EPS is considered in the calculation.
Companies are insistent on share buybacks, as they reduce the float or outstanding shares, thereby boosting EPS. To fund these share buybacks, companies either let go of their cash or increase debt. However, the shrunken share base doesn’t make these shares valuable. In 2014, IBM abandoned its 2015 EPS target of $20 per share.
As we have seen in the earlier part of the series, share buyback is a fairly common practice to boost earnings and share prices. Oracle (ORCL), Microsoft (MSFT), and Cisco (CSCO) have also adopted this route. However, their debt levels aren’t as high. Currently, Oracle and Microsoft have $31.22 billion and $28.31 billion in debt, respectively, while Cisco’s debt stood at $20.52 billion, less than IBM’s $40.8 billion of net debt.