From one point of view, you can't get more boring than IBM (NYSE:IBM). It's a prototypical blue-chip technology company that has been around forever and isn't going to grow like Google (NASDAQ:GOOG) anytime soon. Still, it can do cool things like offer rich share buybacks.
During Tuesday's trading session, Big Blue announced a $4 billion share repurchase that's sure to please shareholders. As we all know, buybacks offer psychological comfort because it puts the company on the same side as investors. Plus, they perform a practical service by reducing the number of outstanding shares, thus enhancing the earnings claim of each share.
Yet, there's a dark side to share buybacks, isn't there? What if the stock is overvalued? What if the company is borrowing to buy those shares? That indeed would be a problem. Richard Gibbons singled out IBM as a clumsy practitioner of the buyback when, in the late 1990s, Big Blue was recalling shares while simultaneously taking on larger debt levels. And despite all those efforts, he points out that the stock price has yet to fully recover from the days of the tech bubble.
I am going to cautiously bless this buyback after much consideration, because Gibbons' concerns do show up with this issue. IBM's corporate website shows that free cash flow has been on the rise the last three years, from about $9 billion in 2002 to $11 billion in 2004. In terms of long-term debt, we see a decrease of 12.7% in 2004 vs. 2003 levels. Now, it should be noted that, according to the Q3 earnings report, long-term debt recently rose 17.2% and that, according to the latest 10-Q filing, free cash flow for the nine months ended Sept. 30 decreased 22% to $7 billion. Nevertheless, total debt levels decreased 6.6% to $21.4 billion, and $7 billion is, well, a lot of cash.
A company like IBM, simply put, is going to have debt. And while I would agree that minimizing debt exposure is critical, I understand that debt can be very useful for companies creating cash flow. The debt hasn't been ballooning out of control the last few years, and if you take the bullish outlook on free cash flow, you can hope that the positive overall trend of the last few years continues. And while concerns about buying overvalued stock are always there, it's not like the company is forced to buy it all back at once. Besides, the shares are arguably not as overvalued as they were several years ago.
IBM is struggling these days in a challenging cycle and with tough competition from Dell (NASDAQ:DELL) and Hewlett-Packard (NYSE:HPQ). But then, IBM, like just about all large caps, will have its ups and downs over the long term. The wise thing here is to buy, hold, and reinvest all dividends. With the sale of the company's PC business and an opportunity for video-game gold with the company's deal to supply chips to Microsoft's (NASDAQ:MSFT) Xbox 360, perhaps Big Blue will see better times ahead. No matter what, IBM is a brand whose software and services should still be in demand years from now.
More big Takes on Big Blue:
- Big Blue Didn't Sell Its Soul
- IBM Sings the Blue
- Something Small, Something Blue
- Compute your thoughts at the IBM discussion board.
Dell is a Motley Fool Stock Advisor recommendation.
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Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.
