IBM reported quarterly results this week that weren’t to Wall Street’s liking. The company beat earnings estimates, but the Street didn’t care. As is often the case in the tech sector, Wall Street is more focused on financial metrics that don’t translate into shareholder value. Revenue growth is where the brokerage community tends to focus, but it is free cash flow, dividends, and share buybacks that create shareholder value. Over the last 12 months, IBM generated $14 billion in free cash flow, paid dividends of $5.6 billion, and repurchased $3.6 billion in stock. Today, IBM is trading at less than 10X last year’s free cash flow and offering a shareholder yield (dividends + buybacks) of 6.7%. The dividend is well covered, has been increased annually for 21 consecutive years, and will increase by another 7% this year.
IBM has some work to do to transition from a company with legacy businesses into a firm with greater share in faster growing segments of tech, but the company is well on its way. The transition won’t be smooth as evidenced by Wall Street’s reaction to the latest quarterly results, but IBM is a firm with a long and storied history of making successful transitions as markets evolve. Don’t forget this is a company that was founded in 1911 to make tabulating machines—decades before mainframes were invented.
Jeremy Jones, CFA
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