IBM’s margins saw improvement despite lack of revenue growth
So far in the series, we’ve discussed IBM’s (IBM) attempts to revive its revenue growth through partnerships, acquisitions, and new launches. Still, IBM failed to register any revenue growth in 2015. Its recent fiscal 3Q15 results marked its 14th consecutive quarter of revenue decline. This impacted its share price, which touched a five-year low in late 2015.
Despite its lack of revenue growth, IBM managed to improve upon its margins due to stringent cost-control measures and strategic divestitures such as Server X and its semiconductor technologies.
Cash, debt, and cash flows
As of 3Q15, IBM held $9.6 billion in total cash and marketable securities. Its total debt stood at $39.7 billion. In fiscal 3Q15, IBM generated CFO (cash flow from operations) and FCF (free cash flow) of $3.5 billion and $2.6 billion, respectively.
IBM has spent more on share buybacks and dividends than research and development
In 2014, Apple (AAPL) had the largest volume of share repurchases, with IBM following. Apart from IBM and Apple, Cisco Systems (CSCO), Oracle (ORCL), Microsoft, and Qualcomm were also heavily involved in share buybacks. Share buybacks are preferred by companies, as they reduce the amount of shares outstanding and increase earnings per share (or EPS).
Since 2005, IBM has spent $125 billion and $32 billion on share buybacks and dividends, respectively. On the other hand, IBM’s capital spending and R&D (research and development) received only $111 billion during the same period.
You can consider investing in the First Trust NASDAQ Technology Dividend Index Fund (TDIV) to gain exposure to IBM. IBM makes up ~8% of TDIV, but investors who would like application software exposure could consider it, as application software makes up ~15% of TDIV.