Is IBM’s $12 Billion Free Cash Flow Goal on Track?

IBM (IBM) seems to be heading in the right direction to achieve its annual FCF (free cash flow) target of $12 billion. At the end of the second quarter, the company generated a FCF of $3.2 billion on a cumulative basis—compared to $3.6 billion in the same period last year. In 2017, IBM’s FCF was $13 billion. In the last five years, the company maintained an annual run rate of ~$13 billion. Based on IBM’s past historical trends, its FCF target of $12 billion in 2018 could be achieved. Even IBM’s capex-to-sales ratio is low at 4.3%.

In the above graph, you can see IBM’s FCF growth in the last five years. During this period, the company’s FCF generation trend was stable.

In the last five years, Microsoft (MSFT) and Oracle (ORCL) also generated an annual FCF of $26.1 billion and $13.1 billion, respectively.

In order to counter the competition and to expand its market share, IBM continues to spend heavily on acquisitions and research and development. In the last three years, IBM has spent nearly $9.5 billion to acquire 34 companies. The company’s inorganic growth strategy might hurt its FCF target.

In the last five years, IBM returned ~$72.5 billion at an average of $14.5 billion every year to its investors through dividend payments and share buybacks. Such a high capital return policy might act as a strong headwind for IBM’s FCF generation.