3 Companies Generating Lots of Cash

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Apple is well known for its huge cash pile. It's often considered one of the most cash generative companies in the S&P 500. Unfortunately, Apple is also famous for not returning cash to shareholders. Indeed, for many years the late Steve Jobs insisted that the company should not pay out a dividend in order to save cash.

Apple isn't alone in being a highly cash generative company with no debt. The three stocks that I have picked today are prime examples of highly cash generative companies that currently have no debt and positive cash balances, and the majority of their shareholder equity is cash. They are very stable companies with solid balance sheets and, of course, plenty of scope for cash return to shareholders.

The one with the most cash
The first company, and the one with the biggest cash balance as a percentage of shareholder equity, is MasterCard (NYSE: MA  ) . MasterCard operates a payment network, which links customers, banks, and retailers to each other. The company skims a fee off each transaction to pay for its services. It also makes money from fees that retailers pay for monthly access to the network.

MasterCard's operations are highly lucrative. Of course, the company had to spend a lot of cash to get the network up and running, but now it has cash flowing in from every direction.





Cash flow from operations




Free cash flow adjusted
for acquisitions




Cash conversion ratio




Figures in millions.

MasterCard is more lucrative than its competitor Visa (NYSE: V  ) (NYSE: V  ) . It carries out more international transactions than Visa, which have a significantly higher average size and bigger fees per transaction.

MasterCard's free cash flow adjusted for acquisitions has grown 534% since 2008, and net operating cash flow from operations has grown 600%! The company's cash conversion ratio has on average been around 90% for the past five years.

As for MasterCard's rising cash and shareholder equity:




Cash as a percentage of total equity



Deducting liabilities from assets gives shareholder equity, or total equity. MasterCard's total equity is rising quickly, in line with its growing cash balance, as the company has almost no liabilities. On average, after the deduction of liabilities, MasterCard's cash balance accounts for 90% of total shareholder equity.

Currently, out of MasterCard's $530 share price, $40 is cash, giving a forward P/E ratio after the deduction of cash of 16.1.

The company's quickly rising cash balance gives plenty of scope for additional future shareholder retuns.

The medical-device maker that's always in demand
Intuitive Surgical
(NASDAQ: ISRG  ) is a medical-device manufacturer, and its products are always in demand. The company has a gross margin of 70% and a net profit margin of 30%.





Cash flow from operations




Free cash flow
adjusted for acquisitions




Cash conversion ratio




Figures in millions.

Intuitive is converting, on average, 80% of its net operating cash flow into free cash -- not as high as MasterCard but still very impressive.

Cash flow form operations has grown rapidly over the past five years -- up nearly 300%. Free cash flow adjusted for acquisitions has grown much faster, up slightly over 300% during the five-year period, mainly because of margin improvements as the company refines itself.

Cash and equivalents are surging at Intuitive. Indeed, cash is forecast to more than double at the company over the next three years, while cash flows continue to improve.




Cash as a percentage of total equity



Unlike MasterCard, the majority of Intuitive's assets are not cash. On average, cash makes up about 38% of Intuitive's shareholder equity. Considering the company has no debt, this gives the company a cash-per-share value of $33. At a current share price of $514 and projected 2013 EPS of $20.60, this gives a forward P/E ratio adjusted for cash of 23.

Intuitive doesn't currently pay a dividend, but with the company's cash balance rising so rapidly, there is plenty of scope for cash return to shareholders in the future.

MasterCard's nemesis
Obviously, MasterCard's main rival is Visa. Visa carries out many more transactions than MasterCard, but at a lower average dollar volume per transaction, which gives Visa a much lower cash conversion ratio. In addition, Visa carries out a lot of domestic transactions that don't qualify for the highly lucrative international transaction fees that MasterCard charges.





Cash flow from operations




Free cash flow adjusted for acquisitions




Cash conversion ratio




Figures in millions.

Visa's highly cash generative nature means that the company has been able acquire competitors without any reliance on debt. Indeed, Visa has no debt but more than $11 billion in goodwill on its balance sheet and a further $11 billion in other intangible assets. 

Unfortunately, this amount of goodwill and other intangible assets does mean that Visa has a smaller part of its total shareholder equity directly in cash.




Cash as a percentage of total equity



On average, over the past five years cash has been about 30% of Visa's total shareholder equity. After the deduction of goodwill and other intangibles from the balance sheet, cash accounts for between 90% and 100% of shareholder equity, on average, over the past five years.

In addition, Visa's cash balance is forecast to almost double between 2013 and 2014.

Visa, MasterCard and Intuitive are all highly cash generative companies with no balance sheet debt and a rapidly rising cash balance. All three have plenty of cash to continue operations even if revenues are hit by falling demand. 

Finally, with such a strong cash balance, all three companies offer lots of potential for future cash return to shareholders, either through special dividends, regular dividends, or share-buyback programs.

If you're on the lookout for high-yielding stocks, The Motley Fool has compiled a special free report outlining our nine top dependable dividend-paying stocks. It's called "Secure Your Future With 9 Rock-Solid Dividend Stocks." You can access your copy today at no cost! Just click here.

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  • Report this Comment On March 12, 2013, at 7:27 AM, Sciddly wrote:

    Makes sense to me... buy a bunch of electronics you don't need and can't afford and put them on a charge card.. LOL!!

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