Texas Instruments (
just got with the program. The company announced Friday morning
that it will increase its existing stock buyback program by $7.5
billion and modestly boost its
Suddenly, using hefty cash balances to buy back stock or boost
dividends is all the rage in the sector, and the chip giant wants
in on the action. I took a look at this trend last week and since
it shows no signs of abating, it's time to look at all the
cash-rich tech companies to see how a stock buyback or a dividend
move would impact their stock. [See:
Why the Cheap Debt Frenzy is Great for Stocks
I ran a screen to find the largest tech stocks that have at least
$1 billion in net cash. I then also looked at their
levels, and by combining cash and cash flow, looked to see how much
they represented as a percentage of a company's
. (Did you know that nearly half of
Yahoo!'s (Nasdaq: YHOO)
market value is accounted for in cash and cash flow?)
By using this as a yardstick, companies could theoretically reduce
their share count by that percentage. For example,
eBay (Nasdaq: EBAY)
could afford to buy back 31% of its stock, and then simply let the
cash balance rebound as future cash flow pours in.
Lastly, I was curious about potential dividend yields. In the past,
tech companies usually loathed dividends because they were a sign
that management no longer had compelling uses for the company's
cash, which meant that growth opportunities were lacking. By now,
we all know that the days of high-growth have ended (except for
Apple (Nasdaq: AAPL)
Google (Nasdaq: GOOG)
and a few others).
A few companies offer paltry dividends with meager yields (except
for Intel's more impressive 3.4% payout), but all of these
companies could offer fairly hefty dividends simply based on cash
flow and leave their hefty cash balances intact.
Symantec (Nasdaq: SYMC)
Dell (Nasdaq: DELL)
could offer dividend yields in excess of 8%. More likely, these
companies would seek to have lower payout ratios, so I looked at
what kind of dividends could be offered up if these companies paid
out 60% of their annual cash flow in dividends. For most of these
companies, that would translate into a
in the 4% to 5% range. Not bad, but not overly impressive either.
With coming tax changes that hike the capital gains rate on
dividends, companies may look to go the buyback route instead.
What Could Happen to Your Favorite Income Spots
Looking at the column "cash flow as % of market cap," these
companies could look to use all of their cash flow to buy back
stock, leave the cash balance intact, and in the cases of Dell, HP
and several others, could reduce the share count by more than 10%
annually. That's just what HP is doing with its recently-announced
$10 billion buyback.
Microsoft (Nasdaq: MSFT)
is rumored to have similar plans afoot.
What are the implications of a 10% annual share buyback? Well, at a
minimum, it boosts
earnings per share (
by a commensurate amount. So a company that is only growing profits
by +5% would see per share profits grow by +15%.
Action to Take -->
Although firms like Dell and Yahoo have ample financial firepower
relative to their market value, I'm especially intrigued by
Symantec, which is now the largest standalone software security
vendor, now that Intel has agreed to acquire
. The company also possesses a hefty data storage division, thanks
to a 2005 acquisition of Veritas.
Symantec's shares now trade for half the value that they traded
when that deal was announced, because the company has never been
able to derive major synergies from the two divisions. But on a
standalone basis, each of these businesses would hold real value to
a suitor, and Symantec should look to shed one and focus on the
other. Analysts seem to focus on a potential full
of the company. Jefferies thinks shares would fetch $19 or $20 if
that happens, while UBS recently boosted its rating on Symantec to
"buy" with a price target of $20 under the assumption that Symantec
is "in play." But I think a sale of one part of the business if
Even without any moves, Symantec is still quite undervalued,
trading at 10 times next year's profits, and management should
seize on that. It could buy back nearly 15% of its stock every year
simply out of cash flow. Sales growth is expected to be flat in the
, but based on very recent trends, are expected to rise more than
+5% next year. That should fuel slightly higher bottom-line growth,
and when coupled with a large buyback, could again make Symantec a
-- David Sterman
David Sterman started his career in equity research at Smith
Barney, culminating in a position as Senior Analyst covering
European banks. David has also served as Director of Research at
Individual Investor and a Managing Editor at TheStreet.com. Read
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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