IBM Corp, which has been regularly repurchasing shares since January 1995 – including a further $3.5bn authorized last week – may have to borrow to continue the buybacks. One analyst who follows the company closely told us that, while IBM can fund both investments (such as expanding disk drive and semiconductor capacity) and share repurchases, we should keep a close eye on the company’s debt position, as free cash flow hasn’t been covering stock repurchases lately. IBM disagrees with that, telling us that cash flow has been covering its repurchases and that it doesn’t anticipate any problem in that area. It believes the share buybacks are a prudent investment and are one element of the company’s long-term business model – one which calls for high single-digit growth at a constant currency level, a gross profit decline of about 1.0% per year and careful cost controls, resulting in a stable net profit of about 7.0%, which is augmented by the repurchases on a per share basis. The company says it sees no reason to change its current model. As for whether things might be different if the repurchases ceased being covered by cash flow, the company declined to speculate.
