This Stock’s Cash Yield Is Overlooked
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Over the past twelve months, International Business Machines (IBM) produced free cash flow equal to 6.1% of its market value, against 4.3% for the median S&P 500 company. A yield that high usually marks one of two things: a business on sale, or one the market expects to shrink. So is IBM shrinking, or simply on sale?
IBM’s Sales, Margin And Cash Have All Grown
Over the past two years, IBM has posted the results of a growing business. Revenue reached $69.9 billion in the four quarters to September 2026, up 6.8% from a year earlier. The operating margin also rose to 18.3% from 15.6% two years before.
Just as they own a share of its profit, shareholders own a share of the free cash IBM produces, whether it is paid out or not. Cash kept in the company still belongs to its owners. When the market recognizes that cash, the price tends to follow, more so when the cash is growing.
Over the past twelve months, free cash flow reached $14.0 billion, up from $11.9 billion a year earlier. The figure has remained above zero in every twelve-month period since September 2023. Software, IBM’s largest business, brought in $30.0 billion in 2025, up 10.6%. The company spent only 11.5% of its operating cash on capital projects over the past year, leaving most of that cash free.
Part of that cash must first service debt. IBM’s net debt, calculated as borrowings minus cash, equals 24.2% of its market value. That brings its yield on enterprise value, which adds that debt to the market value, to a lower 4.9%. Over the past twelve months, operating income covered the interest bill 6.6 times.
Where IBM’s Business Has Been Weaker
IBM has had real weak spots over the past year. Revenue growth slowed to 1.1% in the second quarter of 2026, from 9.5% in the first. On the October 21 call, management said transactional software sales had fallen by double digits in the second quarter, cutting software growth by 4 to 5 points.
Consulting, IBM’s slowest-growing large business, brought in $21.1 billion in 2025, up just 1.8%. Management said the unit’s profit margin declined modestly in the third quarter as it reinvested in what it called digital assets. IBM’s debt is also heavier than that of the S&P 500 as a whole: total debt equals 29.0% of its market value, against 19.4% for the index.
IBM stock lost 18.1% over the past year while the S&P 500 returned 9.8%, and the price appears to assume the weak spots will last. In the third quarter, however, revenue growth picked up to 4.7%. Management said about two-thirds of the large software deals that slipped from the second quarter had closed, and it kept its forecast of 4% to 5% revenue growth for 2026. On those results, IBM looks more like a business on sale than one in retreat.
What IBM Owners Should Watch In January
Two questions remain for an IBM owner: whether the cash keeps rising, and whether the debt stays well covered. Management has raised its full-year free cash flow expectation, which is a forecast rather than a result. It also said it does not expect transaction processing, its mainframe software, to keep growing by double digits after 10% growth in the third quarter. The company will put numbers on its 2027 software outlook in January.
IBM is expected to report its full-year results in January 2027. Free cash flow for 2026 is the figure to watch, against management’s expectation of more than $1 billion of growth.
Beyond IBM: A Systematic Way To Invest
Before you decide on IBM, consider a better choice. Since its September 2020 launch, the Trefis High Quality (HQ) Portfolio has returned 105%, ahead of a benchmark that combines the S&P 500, S&P MidCap and Russell 2000, without betting on one stock.
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