Share repurchases and dividends are often viewed as a good sign for a company since they are ways of returning cash to the investors. However, returning too much cash can possibly put a company in a more challenging situation should there be a downturn in business or should debt markets freeze. During initial growth phases, companies often return very little capital and quite commonly continue to raise it through equity and debt issuance. Some technology companies are only starting to pay dividends, with Cisco Systems, Inc. (NASDAQ: CSCO) a notable example.
Large tech companies are hoarding cash...
Over time many technology companies have acquired large rainy day funds to support operations in the case of a downturn or perhaps a period of stifled innovation. Financial advisors often caution individuals to keep three to six months worth of living expenses. Clearly many technology companies also follow this advice, but often to an even greater extreme. This article will look at the following companies:
Select Technology Companies
|Ticker||Name||Market Cap (August 19th) ($ Billions)||Balance Sheet Cash and Investments ($ B)||Ratio|
|CSCO||Cisco Systems, Inc.||82.9||43.3||52.2%|
|JNPR||Juniper Networks, Inc.||10.5||4.2||39.9%|
|FFIV||F5 Networks, Inc.||5.6||1.1||19.6%|
|BRCD||Brocade Communications Systems, Inc.||1.6||0.5||30.5%|
Source: Data provided by Zacks.com premium services and Yahoo!Finance. Cash and investments reflects cash and cash equivalents, short term investments and long term investments. It should be noted that long term investments may be less liquid. Most companies assets in this group were predominantly cash and cash equivalents or short term investments with the exception of YHOO and AAPL.
The first observation is that these companies have squirreled away very large rainy day funds. While the technology industry is fickle, most of these companies have sufficient cash to support ongoing operations for quite a while. AAPL operating expenses, excluding cost of goods sold, totaled just $2.5 billion in the most recent quarter. This implies that if AAPL stopped selling merchandise and just focused on innovation, AAPL has sufficient cash for the next 30 quarters. Of course, this assumes no increases in head count or capital expenditures, but no revenue for 7.5 years is an equally absurd assumption for them.
But many are actively returning cash to shareholders...
The cash balances are accumulating because these companies have more operating cash coming into the company than uses for it such as capital investments or more commonly dividends and share buy-backs. The following table looks at these companies and how they return cash to shareholders rather than saving it or reinvesting it in their businesses for the most recent quarter.
OCF and Cash to Shareholders ($ Millions)
|Ticker||Operating Cash Flow||Dividends Paid||Net Share Buybacks||Total Cash Returned||Ratio|
Source: Yahoo!Finance, SEC Filings, Author calculations
So while AAPL is not necessarily unique in the fact that it has a very large rainy day fund set aside; it is unique in the fact that AAPL has shown no interest in giving cash back to shareholders through either stock buy backs or dividends. In fact, AAPL is actively issuing more equity and taking in more cash. Perhaps having just 23% of one's market cap covered by cash and investments is insufficient. After all, CSCO has more than 50% of its equity value supported by cash and investments. The above table also shows that the more mature companies are very active in returning cash to shareholders, and almost always in the form of stock buybacks. It should be noted that this reflects just a single quarter of activity.
So what should a casual investor do with this information? The first set of information is interesting in that DELL, CSCO, and HPQ have approximately half their equity value in cash and investments. While it would be important to net debt out, the figures still remain very impressive. CSCO has a little under $18 billion in debt, DELL is under $8 billion, and HPQ is at about $23 billion. Combining this with information in the second table suggests that HPQ and CSCO might be interesting opportunities given their relatively low enterprise values against the operating cash flow they generate. I find CSCO to be very interesting and worth a closer look.
The second table also shows GOOG as a rapidly growing company. Its valuation is no longer driven by high multiples. While it has the third largest market capitalization, it backs that up with the fifth largest operating cash flow.
The negatives from this analysis would be both NFLX and YHOO. NFLX is still a rapid growth company, yet it uses at most 50% of its operating cash flow to reinvest in its business, a lower ratio than both MSFT and CSCO. YHOO also seems to be paying out more than it should, but again this is just a snapshot of a single quarter.
AAPL will continue to puzzle. Its gargantuan operating cash flow is approximately as large as that of MSFT, GOOG, and AMGN combined. Yet it issued about 4x as much stock last quarter as tiny BRCD. With the exception of GOOG and AAPL, all the large techs reviewed now pay dividends. Perhaps AAPL will learn something from the giants, or even mighty F5 Networks, and give some of its cash back to the owners. I think the market would view an AAPL dividend or stock buy back as a positive event.
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.