IBM’s free cash flow is on the rise. The tech giant reported that it generated $9.3 billion of free cash flow in 2022, an increase of $2.8 billion from 2021. And in 2023, IBM expects to grow free cash flow to roughly $10.5 billion, up $1.2 billion from 2022.
During IBM’s fourth-quarter earnings call, CFO Jim Kavanaugh attributed the firm’s growing free cash flow to “working capital improvements driven by efficiencies in [its] collections and mainframe cycle dynamics.” Plus, the combination of strong revenue performance and the timing of the transactions in Q4 led to higher-than-expected working capital at the end of the year.
“Our year-to-year free cash flow growth also includes a modest tailwind from cash tax payments and lower payments for structural actions,” Kavanaugh added.
Free cash flow is the sum of net cash provided by operating activities and net cash flow used in investing activities. This measure is useful when evaluating cash available for financing activities, including shareholder distributions, after investment in the business. It is also a far better way to measure long-term profitability than GAAP earnings, according to investment manager FCF Advisors.
“At FCF Advisors we offer a unique way to gauge quality investment,” said Vince (Qijun) Chen, director of research and portfolio manager at FCF Advisors. “We measure profitability with free cash flow instead of earnings, which is subject to manager discretion.”
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FCF Advisors specializes in free cash flow investment strategies, primarily through its Free Cash Flow Quality Model (FCFQM), a multi-factor model featuring a combination of quality measures informed by the firm’s research.
Ultimately, IBM’s strong – and growing – free cash flow should serve the FCF US Quality ETF (TTAC) well, as it includes the company among its holdings. TTAC aims to outperform the Russell 3000 through a fundamentals-driven investment process that selects about 150 stocks based on free cash flow strength. Its holdings are then weighted by a modified market-cap log transformation, allowing increased exposure to companies with the strongest proprietary free cash flow rankings.
TTAC’s portfolio will also be rated with an ESG score, excluding companies with low ESG ratings. Firms with an extreme rise in share count and increase in leverage are excluded.
“Over the last several quarters, the market has been demanding profitability, and we’ve been measuring profitability through free cash flow,” said Bob Shea, CIO of FCF Advisors. “Free cash flow has never been more important.”
For more news, information, and analysis, visit the Free Cash Flow Channel.