High-technology companies traditionally generate lots of cash and often accumulate a huge stockpile after paying for operations and other needs. How are three of the best-known tech firms spending their money?
Will this trend continue and will investors benefit?
Apple just announced it bought $14 billion of its own shares in the two weeks following its latest earnings announcement, part of a $60 billion authorization approved by the board of directors last year. Over the last 12 months Apple has retired $40 billion worth of stock, a record for any company according to CEO Tim Cook. So Apple has room to run and it is always possible even more cash will be allocated for buybacks.
The argument for buybacks is that the remaining shares will be more valuable and Apple will realize a better return on the investment than leaving it in cash. In addition, if share count is reduced EPS will go up, ceteris paribus.
The argument against buybacks is that Apple will overpay for the shares and that the money could have been used for research and development or acquisitions in order to fund future growth.
Tim Cook stated that the share repurchases indicated Apple has confidence in the company going forward.
For investors to share that confidence Apple needs to release a new product. There hasn't been a new product category coming out of Cupertino since the iPad was introduced in 2010. Indications are that growth from its primary cash cow, the iPhone, will slow down, at least in the short to medium term. The company has provided reduced revenue guidance going forward. If there is any leftover cash and shares can be had at a reasonable price then buybacks are probably justified.
Google prefers to use its cash to buy up other companies to help it grow in targeted industries. The company will spend $3.2 billion to acquire Nest, the maker of networked home gadgets, in a bid to take advantage of the long term growth trend in the Internet of Things. The strategy may be part of a bigger plan to diversify as cash flow from its signature Internet search business, although it is dominant now, may plateau at some point.
The company might use the excess funds from the proposed sale of much of its Motorola Mobility smartphone operations to Lenovo in order to scoop up Nest. Google will clear about $2.9 billion from the move after which it will also take a small stake in the Chinese firm. Google had bought Motorola in 2012 for $13 billion. It will still retain the intellectual property from that deal.
The Google experiment with smartphones didn't work out. It needs better performance with smart thermostats.
Changing of the guard
Microsoft has used a combination of acquisitions and share buybacks over the years. The company is in the process of buying the devices and services division of Nokia in a bid to grow its Windows Phone business, which has been making some inroads into the market. The move was probably designed to help provide a cushion against a softening in its Windows PC operating system business. Shipments of PCs have been on the decline over the recent past.
However, the company has a new leader now. Electrical engineer and company insider Satya Nadella was just elected as CEO of the venerable tech giant. Will Mr. Nadella stay the course or embark on an entirely new strategy? His background at Microsoft has been in cloud computing which is another potential high growth area in tech. Microsoft could employ some of its cash there.
Tech giants Apple, Google, and Microsoft have used different strategies when dealing with extra cash up until now.
Apple has been buying back stock and paying dividends to return value to investors, which is probably not a complete solution. The company really needs to release a new product, on par with the iPhone or iPad, in order to provide a longer term payback to shareholders.
Google has been buying other companies as part of its plan for growth. In the case of Motorola it didn't turn out well. Google is betting that the Nest deal works out and provides some diversity to its revenue stream.
Microsoft has done both buybacks and acquisitions. Unless the new CEO changes tactics Microsoft will muddle along as it has been. If he shakes things up Mr. Softie could go down a different path, such as to the cloud, to higher growth.
Mark Morelli owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.