In investing, free cash flow is the good stuff. Defined as a company's cash from operations minus its capital expenditures, free cash flow is the cold, hard cash left over after regular operations and investments in longer-term business projects are taken care of. This cash can be used to pay dividends, make acquisitions, and repurchase shares.
But not all companies regularly generate free cash flow. Indeed, some lose money after accounting for capital expenditures, and some even report negative cash from operations (ouch!). Others, of course, have proved that they can consistently rake in heaps of free cash flow. Two of these companies are Apple and Microsoft.
Trailing-12-Month Free Cash Flow
Apple (AAPL 0.42%)
Microsoft (MSFT -0.15%)
Here's a look at each of these companies' free cash flow, and how management is using it.
In the trailing 12 months, Apple raked in $50.8 billion in free cash flow. And this absurd level isn't an anomaly. Since Apple's fiscal 2013, free cash flow has ranged between about $45 billion and $70 billion per year.
The tech giant has been able to use this for the world's largest capital return program. Apple has returned over $200 billion to shareholders since it initiated its capital return program in 2012. Of the nearly $234 billion Apple has returned to shareholders, $166 billion of it has gone to share repurchases. The rest has been allocated to dividends.
Apple's current dividend gives investors a dividend yield of 1.5%. But investors can expect this dividend to increase in the future. The tech giant has increased its dividend every year since it was initiated more than five years ago. Indeed, Apple's dividend has increased by an average rate of 11% per year during this period -- a rate Apple maintained with its most recent dividend increase earlier this year.
Microsoft may not have the same levels of free cash flow as Apple, but it's still monstrous. Its free cash flow during the past five years has ranged between a low point of $23.1 billion in fiscal 2015 and a high point of $32.3 billion in the trailing-12-month period as of Microsoft's most recently reported quarter.
Like Apple, Microsoft has similarly been repurchasing shares and paying dividends. The software giant repurchased about $11.8 billion or more of its own shares in fiscal 2015, 2016, and 2017. And the company has repurchased about $10 billion in the trailing 12 months.
Unlike Apple, Microsoft has been allocating more of its capital return program to dividends recently. In the trailing 12 months, Microsoft paid out $12 billion in dividends. That compares with Apple's approximately $33 billion in trailing-12-month share repurchases and $13 billion in dividends during the same period.
Allocating a larger percentage of its capital return program to dividends, Microsoft unsurprisingly has a higher dividend yield than Apple. Microsoft has a dividend yield of 2%, compared to Apple's 1.5% yield.
Thanks to the overall health of its business and a trend of rising free cash flow, management has comfortably raised Microsoft's dividend for seven years in a row. Its most recent dividend increase was a boost of about 8%.
Beyond giving Apple and Microsoft the ability to return cash to shareholders, their hefty free cash flow gives them lower rates when they borrow money, bargaining power with suppliers and partners, and the ability to make timely acquisitions.
Of course, free cash flow can be squandered if it isn't allocated wisely. Companies can buy shares when they're overvalued, overpay for acquisitions, or pay out dividends when they should be repurchasing more shares. Usually, however, the more free cash flow, the better.