There has been a lot of debate recently about what
) should do with its $137 billion cash pile. Some investors think
the company should issue a big special dividend. Others are hoping
for a huge stock buyback. Hedge fund manager David Einhorn is
trying to convince Apple's Board to issue perpetual preferred
stock. Some even want to see a major acquisition.
Whatever the course Apple decides to take, one thing is certain:
that money isn't doing shareholders much good just sitting there.
According to its latest 10-K, 88% of the $137 billion is parked in
low yielding marketable securities - mostly in corporate
securities, U.S. Treasuries, U.S. agency securities and mortgage-
and asset-backed securities
"with the primary objective of minimizing the potential risk of
Buybacks & Dividends
Deciding what to do with excess cash is a good problem for anyone
to have. Apple built up its huge cash balance through years of
exceptionally strong cash flow. Even after the company plows back
billions of dollars every year to fund future growth, it still
generates billions of dollars worth of free cash flow. That's why
the company decided in 2012 to start paying out a regular quarterly
dividend and initiate a stock buyback.
It's not uncommon for companies to distribute more and more cash to
shareholders as they mature. Bigger companies have less growth
opportunities, so they plow back less of their earnings into the
company and more into shareholders' wallets. And dividends, along
with stock buybacks, are the quickest and surest way to return
value to shareholders.
When a company actually buys back its shares, it has a direct
benefit in that it reduces the number of shares outstanding. This
means that earnings are divided among fewer shares. In other words,
your piece of the pie just got bigger. If Apple were to spend, say,
$75 billion buying back its stock at current levels, it could
repurchase approximately 174 million shares, or almost one-fifth of
the entire shares outstanding.
However, stock buybacks don't always add value. If a company
commences a share repurchase in a stock that is overvalued, clearly
that's not a good use of shareholder money. The cash would have
been better spent paying a higher dividend, investing for growth,
or just leaving it in the bank. Of course, with Apple trading at
just 6x forward earnings excluding cash, "overvalued" isn't a word
that comes to mind.
But make sure the underlying business is sound before investing in
a company that's buying back its own stock, because all the
buybacks in the world won't save a company headed off a cliff.
4 Shareholder-Friendly Companies
While I suspect that Apple will announce relatively soon what its
plans are for its 12-figure excess cash pile, there are already
plenty of shareholder-friendly companies out there generating
strong free cash flow, raising their dividends and lowering their
shares outstanding by buying back stock. Here are 4 of them:
International Business Machines
Free Cash Flow in the Last 12 Months (LTM): $ 15,279 million
Share Buybacks in the Last 12 Months (LTM): $ 11,995 million (79%
Dividends Paid in the Last 12 Months (LTM): $ 3,773 million (25% of
5-year Compound Annual Growth Rate (CAGR) in Dividends: 16%
Note: Since 2005, IBM has generated approximately $112 billion in
free cash flow! It has used a whopping $95 billion of that to buy
back its stock and has paid $21 billion in dividends for a total of
$116 billion. If it hoarded cash like Apple, it would have a
ridiculous balance too.
Free Cash Flow LTM: $2,067 million
Share Buybacks LTM: $1,345 million (65% of FCF)
Dividends Paid LTM: $324 million (16% of FCF)
5-year CAGR in Dividends: 21%
Free Cash Flow LTM: $1,096 million
Share Buybacks LTM: $578 million (53% of FCF)
Dividends Paid LTM: $807 million (74% of FCF)
5-year CAGR in Dividends: 12%
Free Cash Flow LTM: $12,693 million
Share Buybacks LTM: $7,600 million (60% of FCF)
Dividends Paid LTM: $5,361 million (42% of FCF)
5-year CAGR in Dividends: 15%
The Bottom Line
Companies have several options when it comes to deploying their
excess cash. These 4 cash machines are choosing to return value to
shareholders through generous dividends and big stock buybacks.
Apple might want to consider doing the same.
Todd Bunton is the Growth & Income Stock Strategist for
and Editor of the
Income Plus Investor service
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Disclosure: The author owns shares of IBM and is long AAPL.
APPLE INC (AAPL): Free Stock Analysis Report
INTL BUS MACH (IBM): Free Stock Analysis Report
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