The Most Profitable Companies in America -- Which are the Best Buys?

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What would you do with $10 billion? That's the tough question posed to a handful of CEOs every year. These executives must redeploy that much money every year, trying to find the right mix of acquisitions, share buybacks, debt reductions anddividend streams. How they spend it is largely a function of where that company is in its life cycle.



For ExxonMobil ( XOM ) , the prodigious profits have a clear purpose. The energy giant topped the list of America's most profitable companies and usually focused on stock buybacks. Exxon's share count fell for eight straight years before rising a bit in 2010. Profits were spread over 6.8 billionshares back in 2002, yet ExxonMobil has bought back two billion shares since then, leading to a 29% reduction in the share count.

Why did the share count rise slightly in 2010? It's because the oil giant deviated from the game plan a bit, making a few stock-based acquisitions in the natural gas sector such as the early-yearacquisition of XTO Energy. Assuming ExxonMobil will once again focus on stock buybacks, the share count may drop from the current 4.8 billion to just four billion by the middle of 2013. For a company with$30 billion in annual income, the shrinking share count willmean record profits per share.

Major U.S. banks are following a different path. They're moving fast to shore up depleted capital bases, hoping to be in stronger financial shape before the next economic crisis. The last crisis was devastating for the sector.

For many years, Citigroup ( C ) had been the most profitable banking firm in the United States. Yet a series of foolish moves has led the bank to backtrack, opening the door for JP Morgan ( JPM ) and Wells Fargo ( WFC ) to surpass Citigroup. These two banks are getting stronger as many regional banks continue to weaken, and if the U.S. economy can move on to a higher plane in the next few years, then both JP Morgan and Wells Fargo may eventually surpass Microsoft ( MSFT ) and AT&T (T) on this list. [Though I'm still a fan of Citigroup , which is slimming down at home to become a stronger player abroad.]

Theprofit superstar
Yet only one large U.S. corporation can truly be called a growth stock. Of course, I'm talking about Apple (Nasdaq: AAPL) . The company's performance was impressive enough that net income rose from $8.2 billion in 2009 to $14 billion in 2010.

What's more impressive is the road ahead. Merrill Lynch predicts Apple will earn $34 billion by 2013, putting it at a close second behind ExxonMobil for the claim of America's most profitable company. To go from barely cracking the top 20 in 2009 to almost the top of the board in just four years is likely a feat unparalleled in U.S. history.

But for Apple's executives, this also creates a real headache. The company had $23 billion in cash and investments in 2009, and that figure could top $100 billion by 2013 if current trends continue. Management is likely ill-inclined to begin buying back shares after they have nearly tripled in two years. Major acquisitions are also unlikely, as Apple prefers to rely on its own R&D. And looking to thebalance sheet won't help -- there's no debt to pay off.

The only likelyoption is a dividend . Apple is likely to generate $25 billion in free cash flow this year. If the company took the really bold step of distributing all of that money to shareholders (leaving a similar amount still parked on the balance sheet ), then investors would be looking at a $25 dividend, good for a 7% yield . Using Merrill Lynch's free cash flow projections, the payout could rise to $35 by 2013, good for a 10% yield.

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How these companies handle their rising cash hoards will help determine where their stock prices go. Steady stock buybacks can boost shares for even the slowest-growing companies. A shrinking share count partially explains why ExxonMobil's stock has more than doubled in the past decade. Then again, companies that have largely avoided any share-boosting moves, like Microsoft, now trade for half their peaks of the early 2000s.

Curiously, it's the most troubled group on this list that really catches my eye. The major bank stocks are expected to show revenue declines this year, yet they are also the only ones that can really be called "cheap" because they're trading right around book value . [Read my previous analysis on bank stocks .] Rising net income should bolster book values for these banks at a reasonably fast clip. This could attract value investors back into the group in coming quarters and boost stock prices.


-- David Sterman


Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , Investing Ideas

Referenced Stocks: C , JPM , MSFT , WFC , XOM

David Sterman

David Sterman

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