Share repurchases and dividends are often viewed as a good sign for a company since they are ways of returning capital to the investors. However, returning too much capital can possibly put a company in a more challenging situation should there be a downturn in business or should debt markets seize up. During initial growth phases, companies often return very little capital and quite commonly continue to raise it through equity and debt issuance. Only just recently has Cisco Systems (CSCO) begun paying a dividend. This comes about two years after CSCO was named to the Dow Jones Industrial Average. This article looks at the following stocks:
|Ticker||Name||Recent Close ($)||Market Cap ($ millions)|
|CSCO||Cisco Systems, Inc.||17.48||96,629|
|JNPR||Juniper Networks, Inc.||37.54||20,081|
Data is provided by Zacks.com services and reflects stock prices as of May 5, 2011.
The focus of the article is to see whether Netflix's (NFLX) policies on returning capital seem inconsistent with what other companies are doing. I've previously written several articles on NFLX and most recently focused on its increasing leverage with adjustments to account for its content obligations. The analysis will look at how much capital is returned to shareholders in the form of dividends and stock repurchases (netted against stock issuances) in relation to operating cash flow.
Share Repurchases more Prevalent than Dividends
The following table shows equity repurchases for the preceding three fiscal years for the 11 companies listed earlier:
Source: SEC Filings. Microsft's fiscal year ends in June, Oracle's ends in May, Apple's ends in September, Cisco's ends in July.
In comparison, I will net out equity issued. I have excluded equity issued as part of incentive programs when the 10-K specifically identified it. This happened for both Intel and Amgen but would not have substantially changed the final conclusions.
Source: SEC Filings
The next table looks at dividends paid. Only three companies paid dividends in 2010.
Source: SEC Filings.
The first observation from this second table is that companies are showing a strong bias towards returning capital to shareholders through share repurchases as opposed to dividends. Only Intel had relatively similar amounts of dividends paid and shares repurchased. Microsoft had about 2.5x the amount of share repurchased as compared to dividends while Oracle had 5.6x the amount of shares repurchased when compared to dividends paid. However, the lower use of dividends makes sense for shareholders since a dividend is taxable to the shareholder. Share repurchases do not create tax liabilities for shareholders, unless they were the ones who sold back to the company.
The following table summarizes the net capital returned to shareholders. The net capital for each year are share repurchases plus dividends less share issuance. With the exception of Microsoft and Cisco, share issuance were not very significant.
The first interesting note is that Apple has not returned any net capital to shareholders over the past three years.
This final table compares the sum of the past three fiscal years of operating cash flow compared to capital returned to shareholders:
|Ticker||Net Capital Returned ($ millions)||Operating Cash Flow ($ millions)||Ratio of Capital Returned /|
Source: SEC Filings
This table also shows that Netflix is clearly the leader among these technology companies when it comes to returning capital to shareholders. As a high growth company, this is actually quite surprising. More established companies like Microsoft, Intel, and Cisco do return substantial amounts of capital to shareholders, but it is still 10 to 20 percentage points less than Netflix. Other observations are that Yahoo has substantially reduced its return of capital to shareholders since 2008. This is probably a response to the company's need to find a new avenue of growth as operating cash flow has been declining over the past three years. The other observation is that Apple, despite enormous amounts of operating cash flow, has not returned any capital to shareholders. Is this an indication that Apple management thinks its shares are overvalued?
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.