Buybacks -- they're back! Across America, corporate coffers are overflowing with Fed-lent and unspent cash. The question is what to do with the stuff. Some companies, like Exelon
That's the decision IBM
Can it pay?
Easily. With $11.7 billion cash in the bank to play with, IBM can pay for its whole repurchase authorization tomorrow if it likes. And while IBM carries a hefty $28.6 billion slug of debt, debt is cheap right now. ("How cheap is it?" It's cheap enough that last year, IBM sold $1.5 billion in corporate bonds at the lowest interest rate ever recorded -- a bare 1%.)
This being the case, there's no pressing need for IBM to earmark its cash for paying down debt. The more so when you consider that the company churned out $15 billion in new cash last year.
Should it pay?
Surprisingly, no. You see, IBM may be right to avoid buying its competitors because their stock prices are too high. But IBM's no screaming bargain, either. Let's take a look at how IBM's valuation stacks up against its peers:
Price-to-Free Cash Flow
Projected Growth Rate
Don't get me wrong. IBM's a great business, and its stock has rewarded shareholders richly over the past year. But as a result, IBM's current 1.3 PEG ratio, and its P/FCF ratio that's 1.8 times as large as its growth rate, make IBM arguably one of the most expensive stocks in the technosphere today. Fact is, IBM would be better off buying a slightly smaller player such as Hewlett-Packard, absorbing its revenue streams, and upgrading its business to match IBM's loftier profit margins, than investing in itself.
My advice: If IBM is so hot for its own stock that it's willing to overpay for it -- indulge them and sell.
Berkshire Hathaway, Exelon, and Microsoft are Motley Fool Inside Value picks. Berkshire Hathaway is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a covered strangle position on Exelon. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway, International Business Machines, Microsoft, and Oracle. Alpha Newsletter Account LLC owns shares of Microsoft.
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