Apple's (AAPL) announcement that it will begin paying dividends and buying back stock was welcome news to many investors because of the amount of cash the company had seemingly just sitting around.
That cash pile largely stems from the innovative products the company offers, including the iPad, iPod, iMac, MacBook and iPhone. I believe the company's upcoming release of its iTV will also be a hit, further bolstering its $550 billion worth.
Apple's success is due largely to its loyal followers who will buy anything that has Apple's name on it just for the sake of owning something that has Apple's name on it. This loyal following, as well as newbies to the world of "i" gadgets, will likely be as enamored with the iTV as they have been with other Apple products. The company's competitors, however, are not waiting idly on the sidelines for customers or market share in this emerging company.
One such company is Cisco (CSCO), which in early March announced that it is making a $5 billion acquisition of a company that specializes in providing video streaming. The move should allow Cisco to be able to offer comparable, if not better, service than what's to come from Apple's TV.
Cisco is purchasing NDS, a UK company that makes software that allows for streaming video to set-top boxes, PCs, mobile phones and DVRs. The software is already being taken advantage of in 125 million households worldwide. Also, NDS' portfolio of products includes an interface for cable and satellite providers like DirecTV (DTV).
I believe this move to acquire NDS can also help Cisco expand its entertainment offerings abroad in markets like China, and India, where NDS has already established a customer footprint.
Consumers may benefit from being able to get video content easier on any device or network, which is currently a challenge. By filling this void, Cisco stands to capitalize greatly.
What's good for consumers is not necessarily good for stockholders. I believe Cisco's streaming products will generate interest from consumers, but it won't be enough to significantly increase shareholder value. Cisco's core business of providing products like switches and routers is what attracts investors to the stock. Therefore, the company's expansion into providing streaming television will not trump its core offerings.
Considering the company's margins and cash flow depend on its core business, Cisco's venture into streaming does not mark a major shift in its business model.
Now let's look at some of the fundamentals of Apple and Cisco to see how they compare. Cisco has a market capitalization of roughly $108 billion. Apple is the world's most valuable company so falling short of its $550 billion market cap is not a defeat. Better, yet, I'd say being a few hundred billion dollars shy of it is nothing to sneeze at.
Cisco's profit margin is relatively low for the industry at 15.61%, compared with Apple's 25.8% profit margin. I believe Cisco's profit margin reflects the company's aggressive acquisition policy. Buying other companies has led to the company's costs increasing faster than its profits.
In Apple's case, I think the profit margin shows how the company has managed to keep its costs low so that they don't outpace its sales. One of the main ways that Apple keeps its costs down is through outsourcing much of its labor production to low-cost countries, like China.
Given these companies are in the technology sector, their costs can be high. I think their profit margins show they are doing a good job at keeping these costs, especially those related to production, under control.
Gross margins at both companies are strong, but I think Cisco's 61.54% gross margin is particularly noteworthy. Apple's gross margin is 42.4%. I think these margins are another example of the strength of both companies because it shows they are well positioned to continue to make and sell products that will increase their sales.
Operating margins for Cisco and Apple are also noteworthy, at 26.64% and 33.87%, respectively. I think Cisco's strong operating margin can be attributed to the company being able to keep its production costs low. It is cheaper to buy a company than it is to invest in R&D and undertake other tasks to introduce a product. Apple's are strong, again reflecting the money it saves by outsourcing its production needs to foreign countries.
For both companies, all of these margins show that they have low-cost operating models, which is crucial in remaining competitive. This is imperative as consumers demand increasingly more entertainment products, such as streaming video on the myriad of devices they carry. For the investor, companies that are able to meet that demand have the best chance of having year-over-year increases in revenue.
Cisco's acquisition of NDS and Apple's upcoming television set show me they are both committed to staying on top of cutting-edge endeavors.
If you are looking for dividend stocks, keep in mind that Apple now joins Cisco as a strong tech company that pays a dividend. Cisco pays a dividend of $.32, yielding 1.6%.
Apple's plan will provide a $10.60 dividend payout each year, yielding 1.8%. The company's board of directors has authorized a $10 billion share repurchase program beginning in the company's fiscal 2013, which begins on Sept. 30. It will be executed over three years.
For all of the reasons mentioned, I strongly recommending taking a position in both companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
