Netflix, Apple and How Tech Companies Return Capital to Investors

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Includes: AAPL, AMGN, AMZN, CSCO, EBAY, INTC, JNPR, MSFT, NFLX, ORCL, YHOO
by: Bennington Investment Ideas

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 (NASDAQ: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:

Leading Technology Companies
Ticker Name Recent Close ($) Market Cap ($ millions)
AMZN Amazon.com, Inc. 197.11 88,897
AMGN Amgen Inc. 57.42 53,541
AAPL Apple Inc. 346.75 319,453
CSCO Cisco Systems, Inc. 17.48 96,629
EBAY eBay Inc. 32.68 42,405
INTC Intel Corporation 23.61 129,572
JNPR Juniper Networks, Inc. 37.54 20,081
MSFT Microsoft Corporation 25.79 216,697
NFLX Netflix, Inc. 230.31 12,181
ORCL Oracle Corporation 34.67 175,448
YHOO Yahoo! Inc. 18.43 24,132
Click to enlarge

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 (NASDAQ: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:

Share Repurchases ($ millions)
Ticker 2008 2009 2010
NFLX 200 324 210
AMZN 100 - -
EBAY 2,178 - 711
INTC 7,195 1,762 1,736
MSFT 12,533 9,353 11,269
AAPL - - -
ORCL 2,023 3,972 992
JNPR 605 454 565
AMGN 2,268 3,208 3,786
CSCO 10,441 3,611 7,864
YHOO 1,749 113 79
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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.

Share Issuance ($ millions)
Ticker 2008 2009 2010
NFLX 19 35 50
AMZN - - -
EBAY 153 103 236
INTC - - -
MSFT 3,494 579 2,311
AAPL 483 475 912
ORCL 874 760 1,288
JNPR 119 164 451
AMGN - - -
CSCO 3,117 863 3,278
YHOO 167 113 363
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Source: SEC Filings

The next table looks at dividends paid. Only three companies paid dividends in 2010.

Dividends Paid ($ millions)
Ticker 2008 2009 2010
NFLX - - -
AMZN - - -
EBAY - - -
INTC 3,100 3,108 3,503
MSFT 4,015 4,468 4,578
AAPL - - -
ORCL - 250 1,004
JNPR - - -
AMGN - - -
CSCO - - -
YHOO - - -
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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.

Net Capital Returned to Shareholders ($ millions)
Ticker 2008 2009 2010 Total
NFLX 181 289 161 631
AMZN 100 - - 100
EBAY 2,025 (103) 476 2,398
INTC 10,295 4,870 5,239 20,404
MSFT 13,054 13,242 13,536 39,832
AAPL (483) (475) (912) (1,870)
ORCL 1,149 3,462 708 5,319
JNPR 486 290 114 890
AMGN 2,268 3,208 3,786 9,262
CSCO 7,324 2,748 4,586 14,658
YHOO 1,582 - (284) 1,298
Click to enlarge

Source: Calculated

The first interesting note is that Apple has not returned any net capital to shareholders over the past three years.

Conclusion
This final table compares the sum of the past three fiscal years of operating cash flow compared to capital returned to shareholders:

Net Capital Returned vs. Operating Cashflow
Ticker Net Capital Returned ($ millions) Operating Cash Flow ($ millions) Ratio of Capital Returned /
OCF
NFLX 631 886 71.2%
MSFT 39,832 64,722 61.5%
INTC 20,404 38,788 52.6%
AMGN 9,262 18,111 51.1%
CSCO 14,658 32,159 45.6%
JNPR 890 2,483 35.8%
YHOO 1,298 4,430 29.3%
EBAY 2,398 8,536 28.1%
ORCL 5,319 24,338 21.9%
AMZN 100 8,485 1.2%
AAPL (1,870) 38,350 -4.9%
Click to enlarge

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.