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.
, 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
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,
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 (
Wells Fargo (
to surpass Citigroup. These two banks are getting stronger as many
regional banks continue to weaken, and if the U.S.
can move on to a higher plane in the next few years, then both JP
Morgan and Wells Fargo may eventually surpass
on this list. [Though
I'm still a fan of Citigroup
, which is slimming down at home to become a stronger player
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
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
. 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
), then investors would be looking at a $25 dividend, good for a 7%
. Using Merrill Lynch's free cash flow projections, the payout
could rise to $35 by 2013, good for a 10% yield.
Action to Take -->
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
. [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.
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