How IBM’s Higher Leverage Is Impacting Business

Factors behind IBM’s growing debt

IBM’s (IBM) debt has grown over the last two years, driven by the company’s capital return policy. In the last five years, the company has returned ~$72.5 billion to investors at an average of $14.5 billion every year, exceeding the company’s average annual free cash flow of $13 billion. The excess is being financed by debt, as are the company’s acquisitions.

How IBM’s Higher Leverage Is Impacting Business

In the last five years, IBM has spent ~$13.3 billion on acquisitions, of which ~$9.5 billion was spent in the last three years to acquire 34 companies. Over the last five years, the company’s debt has grown at a compound annual rate of 4.2%.

Peer comparison

IBM’s leverage is among the highest in its peer group. While IBM’s debt-to-equity ratio was 255.4 in fiscal Q1 2018, Microsoft’s (MSFT), Oracle’s (ORCL), and Accenture’s (ACN) ratios were 97.4, 124.8, and 0.3, respectively. This high leverage indicates that IBM relies heavily on debt for financing. In the next five years, ~$21.1 billion in debt is due to mature, which may not only pressure IBM’s cash flow but also impact its capital returns and inorganic growth strategy.