) announced on January 13 that
it was acquiring Internet-connected thermostat and
smoke alarm maker Nest Labs for a whopping $3.2 billion in cash
. Google has over $58 billion in cash and securities sitting on its
balance sheet, so it can certainly afford it. But whether or not
this will be a good use of shareholders' money remains to be seen.
Businesses have several options when it comes to deploying their
excess cash. They can make acquisitions like Google just did, fund
organic growth, pay down debt, or return it to shareholders through
dividends or stock buybacks.
Of course, a company can just let that money sit in the bank and
grow its cash hoard. But with interest rates near record lows,
they're generating very low returns for their shareholders.
Ideally, a company should use its capital to maximize long-term
value for their shareholders. But clearly some managers understand
this concept better than others. Many corporate executives are more
concerned about empire-building than producing high returns on
capital and often make reckless decisions with shareholders' money
that destroys value over time.
If you own a company for the long-run, make sure you know how it is
managing its cash.
Buybacks & Dividends
It's not uncommon for companies to distribute more and more cash to
shareholders as they mature. Bigger companies have less growth
opportunities and compete in crowded markets, 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 a company has the excess funds and their stock is undervalued,
buybacks can add tremendous value over time. But make no mistake:
stock buybacks don't always add value. In fact, history shows that
companies are often bad at timing their repurchases, buying when
their share price is high.
The cash allocated to their overvalued stock would have been better
spent investing for growth, paying a higher dividend, or just
leaving it in the bank.
So make sure the underlying business is sound and the stock is
reasonably priced 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
With that in mind, here are 4 solid, shareholder-friendly companies
generating strong free cash flow, raising their dividends and
buying back stock:
Free Cash Flow (Trailing Twelve Months): $14,618 million (8.5% of
Share Buybacks (Trailing Twelve Months): $10,750 million (74% of
Dividends Paid (Trailing Twelve Months): $1,980 million (14% of
5-year Compound Annual Growth Rate (CAGR) in Dividends: 19%
Free Cash Flow (TTM): $1,321 million (6.4% of market cap)
Share Buybacks (TTM): $1,607 million (122% of FCF)
Dividends Paid (TTM): $345 million (26% of FCF)
5-year CAGR in Dividends: 13%
Free Cash Flow (TTM): $7,730 million (6.2% of market cap)
Share Buybacks (TTM): $4,610 million (60% of FCF)
Dividends Paid (TTM): $2,055 million (27% of FCF)
5-year CAGR in Dividends: 17%
Free Cash Flow (TTM): $3,239 million (6.3% of market cap)
Share Buybacks (TTM): $3,547 million (110% of FCF)
Dividends Paid (TTM): $723 million (22% of FCF)
5-year CAGR in Dividends: 16%
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.
Todd Bunton, CFA is the Growth & Income Stock Strategist
and Editor of the
Income Plus Investor service
Want More of Our Best Recommendations?
Zacks Executive VP, Steve Reitmeister, knows when key trades are
about to be triggered and which of our experts has the hottest
hand. Then each week he hand-selects the most compelling trades and
serves them up to you in a new program called
GOOGLE INC-CL A (GOOG): Free Stock Analysis
LOWES COS (LOW): Free Stock Analysis Report
MACYS INC (M): Free Stock Analysis Report
ORACLE CORP (ORCL): Free Stock Analysis Report
QUALCOMM INC (QCOM): Free Stock Analysis Report
To read this article on Zacks.com click here.