4 Cash Rich Tech Firms: Which are Worth Buying?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As the national debate centers on tax “reform,” there are some items of reform that are already near certainty. Chief among them is that tax rates for dividends and capital gains will in the future not be as low as they are today. As a result we see many companies scurrying to return capital to their shareholders in advance of these anticipated higher rates.
Much has been made that some of the country's wealthiest individuals, from Mitt Romney to Warren Buffett, pay a lower percentage of their income in federal taxes than do their secretaries. The current dividend tax rate of and capital gains tax rates of 15% causes these distortions, and are regressive in nature. They are therefore a prime target of the populist based, comprehensive tax reform package many in Congress claim to be seeking. A hike in dividend and capital gains taxes to 28% would be perceived as more fair than the current system, and would raise, if coupled with exemption limitations on upper incomes, $1.5 trillion to $1.8 trillion (over ten years) in revenue to get us started on fixing our chronic budget imbalance.
At this time, according to the IRS, non-financial companies are sitting on nearly $4 trillion in unused cash. Plus banks are sitting on another $1.5 trillion in excess reserves. A University of Massachusetts study found if $1.5 trillion of bank and non-bank money were invested in the economy, unemployment would fall below 5% in this country by 2014. Tech companies like Microsoft (NASDAQ: MSFT) and Cisco (NASDAQ: CSCO) lead the way with $62 billion and $49 billion of cash on hand respectively. Neither of these once high fliers can be thought of as a growth company in this day and age. Their respectable valuations are as much a function of the strength of their balance sheets as to anything else, but surely, either acquisitions, substantial capital investments, or substantial dividends to shareholders would make sense with those sorts of cash holdings. Contrast that with the large cash holdings of ExxonMobil (XOM). While the energy giant sits upon $18 billion in cash, the tenth most among American companies at the end of the third quarter, it has a 5 year capital spending plan of $37 billion, and pays a regular dividend of nearly $11 billion per year.
Coming off its first quarterly loss in twenty years in the third quarter of this year, Microsoft is struggling with declining personal computer sales, competition in tablets from the likes of Google (GOOG), and thus far an epic failure in its cellphone operating system. In the third quarter of this year, personal computer sales fell 8% from the year ago, and there is no reason to believe for a turnaround any time soon. Microsoft does not have the stranglehold on tablet and cell phone operating systems that it has in personal computers, yet we all know more Christmas boxes will have tablets and cell phones in them than laptops or desktops. The company's new Windows 8 operating systems is off to a poor start though, and the ubiquitous windows operating system, along with basic related application software, is the bread and butter for the company.
This is not to say that Microsoft is without some thriving divisions. Its Server and Tools unit contains six discreet businesses with over $1 billion in sales each. The company's X Box gaming system has been a complete success.
The mean of the 31 analysts following Microsoft is for $0.78 per share in earnings in the fourth quarter and $2.90 for the year. I just don't see it. Adjusted earnings missed analysts' expectations in the third quarter, and I expect another miss this quarter. I need to see the company better adjust to consumer tastes before endorsing a purchase, and would avoid Microsoft despite its terrific balance sheet and attractive, 3.5% yield.
Cisco is a leading internet infrastructure company. Its strength is wired communications, and it recently acquired leading private tech company Meraki Technology in an effort to jump start Cisco's presence in wireless and cloud based connectivity. If successful, shareholders might forget that Cisco paid as much as twice what it should have for Meraki.
As it stands now, Cisco's revenues are primarily a function of its relationships with governments and large companies worldwide. Of course, those government contacts have proven difficult to monetize in recent years, leading to flattened earnings comparisons. Over the last five years earnings growth has averaged less than 5%. While the European Community still shows no signs of life, demand for wireless connectivity has done nothing but grow, and will help Cisco to move forward with earnings growth averaging closer to 10% going forward. With its stellar balance sheet and above average, 3.2% yield, Cisco is a fine choice for conservative investors.
Apple (NASDAQ: AAPL) used to lead the way with over $100 billion cash on its balance sheet. That amount is being slashed, largely though a dividend yield of 2% and a $10 billion share buyback. Apple had a third quarter that was below what some had expected, and its stock has absolutely tanked, down some 20% since September.
Part of Apple's share price plunge is doubtless due to the fact that many holders of the stock are sitting on massive capital gains, and getting out now will avoid a steeper tax burden likely to exist in the future. But the fall in price began long before the election, largely as a function of warnings about profit margins in the key fourth quarter. Historically Apple's profit margins suffer when introducing a new or revamped product and much of Apple's consumer product line is in the process of turning over. All this will be resolved by the second quarter of 2013, I suspect. As it is now, you can buy Apple for just 12 times earnings, and with a PEG of 0.51. I know of few companies “priced to move” as much as Apple is today.
Oracle (NASDAQ: ORCL) also has traditionally sat on a large cash hoard. At the close of the third quarter, its $37 billion cash was the fourth most of any domestic company. But Oracle is virtually without equal in its frequency of acquisitions it uses to grow the company. Right now Oracle is basking in the glow of not being Hewlett Packard (HPQ), as Oracle walked away from Autonomy Software, citing price concerns just before Hewlett Packard bought the company. Otherwise, now that Mark Hurd is the co-President, one might expect Oracle to be a little less exciting that in the days of its mercurial founder, Larry Ellison.
Oracle has placed much of its future growth in the hands of the “Cloud.” It has made a series of acquisitions to enhance its cloud presence and its infrastructure as a service business. These units allow smaller companies to utilize Oracle's enterprise products without having to shell out for expensive mainframes.
Oracle is fairly valued with a PEG of 0.94, and pays a nominal dividend. I do not look for Oracle to do a lot better than perform with the market, but for conservative investors interested in a strong balance sheet, that might be good enough.
StockCroc1 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!