Cash Flow Analysis on Apple Stock: What You Need to Know

Source: Apple

Cash flows are of utmost importance when making investment decisions. After all, a company's intrinsic or fundamental value ultimately depends on the cash flows it produces for shareholders over time. Besides, watching the different sources and uses of cash flows can be enormously valuable in terms of understanding a company's strategy, strengths, and weaknesses.

Let´s take a look at Apple (AAPL 0.34%) from the point of view of a cash flow analysis in order to find out what the future may bring for investors in Apple stock.

Cash flows from operations
Cash flows from operations are a crucial part of a cash flow statement. Like the name indicates, this shows how much cash the company produces internally from its own operations, as opposed to money coming from borrowings or other kinds of financing and investing activities.

Apple produced $46.46 billion in cash flows from operations during the nine month period ending June 2014, a 6% increase versus $43.76 billion in the same period last year. The business is clearly generating a lot of money, although growth rates have decelerated materially in recent years. We can see from a longer term perspective that Apple was growing at much faster rates in years like 2011 and 2012.  

Data in billions. Source: SEC filings

The smartphones and tablets markets are maturing, especially in developed countries. While emerging markets are still under penetrated in comparison, Apple has a pricing disadvantage versus lower cost Asian manufacturers such as Samsung (NASDAQOTH: SSNLF) in those geographies, especially since the carrier subsidy model is not as extended in those markets as in the U.S.

Apple has recently launched its new iPhone 6 and iPhone 6 Plus models, and the company is venturing into new areas with intriguing potential, such as smart watches and digital payments with Apple Watch and Apple Pay, respectively.

Considering Apple's brand value, loyal customer base and impressive track record of success over the long term, these innovations could easily accelerate growth in the middle term. On the other hand, Apple is a global juggernaut generating nearly $180 billion in annual sales; it's not simple for a company of that size to find growth opportunities that are big enough to move the needle. Even if growth rates improve somewhat over the coming quarters, Apple has most likely moved beyond its high growth stage.

Uses of cash flows
In addition to analyzing a company's ability to produce cash flow from its regular operations, it's important to watch the different uses management is giving to that money. Free cash flow is calculated as operating cash flows less capital expenditures, and it's particularly illustrative because it tells investors how much money is left after the company reinvests a portion of its operating cash flows in property, plant, and equipment to sustain growth.

Apple generated $46.46 billion in operating cash flows during the last three quarters, and the company needed to reinvest only $5.75 billion in property plant and equipment over that period, so free cash flow amounted to a big $40.71 billion. Capital expenditures absorbed a notoriously low 12% of operating cash flows, which shows that Apple is a very profitable business with small reinvestment needs.

This number can fluctuate considerably from quarter to quarter, but the fact remains that Apple is tremendously efficient when it comes to transforming operating cash flows into free cash flows. In comparison, Samsung typically reinvest between 40% and 50% of its operating cash flows in property plant and equipment.

This is a big positive for investors in Apple stock, since it allows the company to allocate huge sums of money to capital distributions via dividends and buybacks. The more money the company gets to keep after paying for capital expenditures, the more generous the dividends and buybacks, so investors receive a bigger share of the cash flows produced by the business.

Over the last three quarters Apple distributed $8.3 billion in dividends and a jaw-dropping sum of $28 billion in share repurchases. Dividends and buybacks amount to 20% and 69% of free cash flows during the last nine months, meaning that Apple distributed 89% of free cash flows to investors during the period. In a nutshell, most of the cash Apple generates is being distributed to investors in Apple stock.

The bottom line
Apple generates a ton of money from its ongoing operations, even if growth rates have understandably slowed down as the company got bigger and its main markets matured over time. Reinvestment needs are quite low, so Apple gets to hang on to most of that money as free cash flows, which the company uses mainly to reward investors with generous dividends and share buybacks. Apple looks strong enough to continue making massive cash flow distributions over the long term, and this bodes well for investors in Apple stock over the coming years.