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Why IBM’s Position in the Technology Sector Might Be in Jeopardy

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Apr. 6 2015, Updated 5:07 p.m. ET

High cash reserves for companies in the technology sector

Tech companies are usually associated with high cash reserves. If we take into account the cash balance of leading tech companies like Apple, Microsoft (MSFT), Google (GOOG), and Cisco, the collective total is $345 billion. This figure represents approximately 23% of the cash reserves in the US in 2013. The majority of the cash piles that these companies hold is offshore, which when brought back to the US might be subjected to high tax.

Owing to their high cash balance, these companies have leeway to increase their debt levels or invest  in capex, R&D (research and development), or make acquisitions. To learn more about investing in the tech industry, please read Why Tech Stocks Have Run Up for the Last Six Years.

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.

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As we have seen in the earlier part of the series, IBM (IBM) has also taken on debt to fund its dividends and share buybacks. IBM’s peers Oracle and Cisco have also adopted this route. However, their debt levels are not as high. Currently, Oracle has $31.22 billion in debt while Cisco’s debt stood at $20.52 billion, less than IBM’s $40.8 billion of net debt.

Technology sector is less leveraged

Facebook (FB) has negligible debt on its books, while other technology players like Google, Intel, Apple, and Microsoft have slightly higher debt-to-equity (or DE) ratios of 5%, 24%, 29.5%, and 30.1%, respectively. The DE ratio is a measure of a company’s financial leverage that indicates the allocation of equity and debt the company uses to finance its assets.

Huge cash reserves and low debt associated with the technology sector don’t fully apply to IBM

As compared to other sectors, the tech industry is less leveraged or has relatively less debt, though IBM is an exception here. If the US economy experiences improvement, the Fed is likely to raise rates. During periods of rising rates, the tech sector tends to perform better than other sectors due to its cash balance and less dependence on debt. Thus, in the long term, if IBM continues to take on huge debt to fuel its growth, it could limit its profitability as well as its ability to expand into new businesses.

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