In the 12 years between 2000 and 2012 IBM stock grew free cash flow by 8.7% on an annualized basis. During this period, operating margins expanded by 6.8% annually thanks to its evolution from hardware business into a software and service company.
Since 2000, IBM stock has returned $150 billion to shareholders, including reducing its share count by 35% through share repurchases. If IBM continues to buy back its stock at the same rate, Berkshire Hathaway will own 9.3% of IBM stock without buying another share.
In the three years between 2013-2015, IBM expects to make $20 billion in acquisitions and $15 billion in capital spending while still returning $70 billion to shareholders in the form of dividends and stock buybacks.
If the past 12 years is any indication, you can expect IBM stock to generate annual free cash flow of at least $18 billion or $54 billion over three years. With approximately $105 billion spoken for excluding debt repayment, it’s going to need to pick up the pace if it wants to meet its goals without taking on further debt.
Regardless of what happens, it certainly generates enough free cash to support a higher debt load. Obviously, CEO Ginni Rometty is confident that it can meet its plans for cash over the next couple of years. I see no reason to doubt that.
IBM Stock Bottom Line
IBM stock has been a major disappointment the past couple of years, underperforming the S&P 500 by 10 and 33 percentage points respectively in 2012 and 2013. By comparison, Berkshire Hathaway has matched the index and should continue to do perform reasonably well.
So, should you have IBM on your buy list?
If it were me I’d be more inclined to buy Berkshire Hathaway’s B shares to benefit from any resurgence in IBM stock. Having said that, I don’t think you risk much owning IBM at current prices. With a reasonable dividend and significant share repurchases, shareholders could do a lot worse than owning IBM stock.
As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.