Market Cap Payback Ratio: What To Avoid In A Risk-Averse Portfolio

by: James Holden

The fact that title “number one” comes with an expiration date is something investors need to remember. Anti-monopoly rules allow for others to compete and therefore many companies have a chance to take over that coveted spot. All it takes is for a company to become complacent in a dynamic consumer environment or underestimate the effects of a marketing decision. Research in Motion (RIMM) fell asleep with its Blackberry and lost 88 percent of its market cap since June 2008 as Apple (AAPL) transitioned its hit business from the iPod to the iPhone. Netflix (NFLX) made a bad marketing decision and lost 76 percent of its market cap since its high in July 2011 based on the decision to split its DVD and streaming business and its clients’ disapproval.

Market cap payback ratio (MCPR) is a metric that gauges speculation in the current market price and the risk of substantial market price deterioration if things went wrong today. Based on this metric, there are some companies that you should clearly avoid in a risk averse portfolio and make better short candidates if they stagger. MCPR is based solely on the Finance 101 fact that investments should be valued today on current and future dividends. Not all cash is equal; some is used to reward investors while other is used to invest in growth. Operational cash flow, while an oversimplification, is money that “could” be used to pay shareholders dividends. Market cap payback ratio is the market cap of a company divided by a three year average operational cash flow. MCPR tells you how many years it would take to repay investors the current value of their investment in dividends if all operational dollars went towards dividends and business stayed as successful as current levels.

Company Market Cap 3Yr Avg. CFFO MCPR
Exxon Mobil (XOM) 389.88 45.52 8.69
Apple (AAPL) 365.83 22.10 15.38
International Business Machines (IBM) 229.31 19.71 12.59
Microsoft (MSFT) 216.19 23.37 7.42
Chevron Corp (CVX) 207.61 26.79 7.35
Google (GOOG) 203.21 9.42 17.83
Wal-Mart Stores (WMT) 199.73 24.35 10.35
Procter & Gamble (PG) 178.75 14.74 14.18
General Electric (GE) 177.79 36.38 15.19
Johnson & Johnson (JNJ) 176.22 15.97 10.25
Oracle (ORCL) 159.86 9.38 15.24
Coca-Cola (KO) 153.47 8.43 19.71
Pfizer (PFE) 158.04 15.43 11.03
Intel (INTC) 127.35 12.93 9.24
Merck & Co. (MRK) 108.75 5.86 19.01
Cisco (CSCO) 101.50 10.05 7.36
Other Notable Names
Research In Motion (RIMM) 8.57 2.83 2.62
Netflix (NFLX) 3.72 0.30 12.07
Hewlett-Packard (HPQ) 55.49 13.30 5.87
Nokia (NOK) 19.14 5.19 2.29

MCPR Analysis

Coca-Cola and Merck have high MCPRs with 19.71 and 19.01 respectively. Both companies have history dating back to the 1800’s and their industries allow you to assume, barring any unseen circumstances, that 20 years from now they will be equally successful.

Top technology companies today include Apple, Google, Cisco, Oracle, Microsoft, IBM, and Intel. Their MCPR are 15.38, 17.83, 7.36, 15.24, 7.42, 12.59, and 9.24. for an average of 12.15. I believe Apple has too large a target on its back and is in too dynamic of an industry to assume its current level of success for 15 years to come. Research in Motion is much smaller and less diversified than Apple, but it shows a lesson of what could happen when expectations are deflated. BlackBerry’s loss of market share began the tumble from a market cap of 77.13B down to 8.57B and a MCPR of only 2.62. Another current giant, Google, has only been registered as a domain name since 1997, or 14 years. With a MCPR of almost 18 years, I would put them on a list of companies to avoid today.

When comparing two companies that had expectations deflated, Research in Motion and Netflix, MCPR analysis makes me believe that Netflix has room for an additional fall. At a current MCPR of 12.07 it is still valued as a more stable company and is currently valued to make 4.6 times more operating cash than Research in Motion going forward.

MCPR offers a fresh look at major players that investors may be enticed to hold for the long term. It is true that some companies deserve higher MCPR due to their longevity in their market position. On the flip side, it is absurd to think companies in aggressive industries will be able to withstand competition for as long as the MCPR determines. Considering this metric may allow investors to choose wisely for their conservative portfolios.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.