Tim Cook had little to say about new money-makers. On the conference call, he responded to an analyst question about new products by saying only, “I don’t want to be more specific, but I’m just saying we’ve got some really great stuff coming in the fall and across all of 2014.” It sure sounds like WWDC might be a bust for anyone with high expectations for what’s coming next.
It won’t stop cash build
Apple Inc. (NASDAQ:AAPL) is generating free cash flow at a run-rate of $45 billion per year. Assuming that Apple pays out $100 billion over the next two and a half years in the form of repurchases and dividends, the company will continue to sit on substantially all of its current $145 billion cash hoard.
In effect, Apple’s capital allocation decisions did not address the $145 billion it has in cash right now. Rather, the company only decided what it would do with the next two and a half years of expected free cash flow.
So what about the $145 billion in hand? Does a cash cow like Apple – a company that doesn’t spend heavily on capex – really need a surplus of $145 billion in cash? Dividends and repurchases are spectacular going forward, but what about the money in hand today?
The company also failed to comment on how it might increase its dividend or repurchase in the future.
There’s one reason to love Apple’s $100 billion plan
Other companies in the space may be pushed into following Apple’s lead. Microsoft Corporation (NASDAQ:MSFT) has the same slowing growth profile in technology, and has much of its balance sheet in cash overseas.
Microsoft Corporation (NASDAQ:MSFT) has cash and short-term investments of $74.4 billion and only $11.9 billion of long-term debt. That gives the company plenty of opportunity to create value for shareholders by putting cash back in their hands. One speed bump: Microsoft Corporation (NASDAQ:MSFT) has consistently increased its dividends in every year since 2004 with the exception of 2010, when the quarterly dividend was held flat at $.13. The company is gaining attention in dividend growth investing circles, which is great for attracting a new investor. A one-time special dividend such as the one paid in 2008 would help court more dividend investors.
Cash-rich Cisco Systems, Inc. (NASDAQ:CSCO) is another candidate for a higher dividend or repurchase, with $46 billion on in cash. Cisco has a similar story: repatriation would cost the company dearly in the form of taxation. As it has only $16.25 billion in long term debt, there’s room for inexpensive borrowing in the US to bring profits back to shareholders.
Cisco Systems, Inc. (NASDAQ:CSCO) first joined the dividend-paying technology company club in 2011. Since then dividends have more than doubled to $0.17 per quarter, up from $0.08. Some investors claim it was Cisco Systems, Inc. (NASDAQ:CSCO)’s most recent dividend increase that finally pushed Apple to do something with its cash.
The transformation to a value stock isn’t easy. Now that these three firms have come to terms with the idea of capital allocation, let’s just hope they’ll continue shareholder-friendly repurchases and dividend increases. If you can’t put up leading growth, lead in returning cash to its rightful owners: shareholders.
The article Why Apple’s $100 Billion Plan Is a Disappointment originally appeared on Fool.com is written by Jordan Wathen.
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