It's very interesting that Microsoft is the first large tech company to do this in the current cycle. So many of their peers are also wallowing in cash and seemingly unwilling to make large investments so the pile keeps growing.
Companies are supposed to use their capital to innovate and create new, market-changing products and services. Perhaps it's because interest rates are so low and therefore capital is so cheap? Is the hording related to an expectation of another round of the regular tax amnesty for them to repatriate the funds to the US?
In the last quarter, Google reported $54.4B in cash and short term investments and $14.1B in revenue, Apple reported $42.6B in cash and equivalents and $35.3B in revenue and Microsoft reported $76.7B in cash & equivalents and $19.8B in revenue.
Measured in terms of quarters of revenue held in cash & equivalents, Google and Microsoft are more or less tied at 3.8 quarters, and Apple is running relatively lean at 1.2 quarters.
Despite not paying dividends Google is, proportionate to revenue, not holding any more cash than Microsoft, and Apple is holding far less.
Why is 'revenue' the proper denominator, and not 'earnings' ?
Sure, if revenue hypothetically vanished, cash could cover it, but a lot of revenue is tied to expenses ("cost of goods sold" in the retail world), so if revenue dropped, expenses would as well.
You should be using profit not revenue (also, not all quarters are the same, using merely the most recent one is a bad practice). Measured in terms of years of profit being hoarded google is at 5 years, Apple is at 1 year, and Microsoft is at 3.5 years. No matter how you slice it that's a crap ton of money.
I agree with the GAAP rules, but the GAAP rules require < 90 day instruments. The complexity of rolling $140B every 90 days is insane. You are going to have days where there just isn't enough liquidity.
They are basically managing $100B in house rather than getting screwed by banks every 90 days. GAAP is right, Apple is also right, but saying they only have $40B in cash, is very misleading. They could return $100B to shareholders in 6 months with ease.
Do note that Microsoft has an ongoing $40 billion share repurchase program that's ending in two weeks.
So they're just renewing the buybacks with another $40 billion. It would actually have been a bigger deal if Microsoft had allowed the program to expire without a replacement.
From Microsoft's annual report for fiscal year 2013:
"On September 22, 2008, we announced that our Board of Directors approved a new share repurchase program authorizing up to $40.0 billion in share repurchases with an expiration date of September 30, 2013. As of June 30, 2013, approximately $3.6 billion remained of the $40.0 billion approved repurchase amount."
And the 2008 buyback program was, in turn, a continuation of the 2004 buyback program.
The idea behind keeping capital in the company is that the company is able to generate better returns than the shareholders could.
There's no reason why this has to be market changing, etc. Building a new factory that produces the same goods with more capital and less labour could be a use that would generate greater returns.
There are many reasons to hold capital and many reasons to dividend it.
Comments
It's very interesting that Microsoft is the first large tech company to do this in the current cycle. So many of their peers are also wallowing in cash and seemingly unwilling to make large investments so the pile keeps growing.
Companies are supposed to use their capital to innovate and create new, market-changing products and services. Perhaps it's because interest rates are so low and therefore capital is so cheap? Is the hording related to an expectation of another round of the regular tax amnesty for them to repatriate the funds to the US?
I don't buy the "wallowing in cash" argument.
In the last quarter, Google reported $54.4B in cash and short term investments and $14.1B in revenue, Apple reported $42.6B in cash and equivalents and $35.3B in revenue and Microsoft reported $76.7B in cash & equivalents and $19.8B in revenue.
Measured in terms of quarters of revenue held in cash & equivalents, Google and Microsoft are more or less tied at 3.8 quarters, and Apple is running relatively lean at 1.2 quarters.
Despite not paying dividends Google is, proportionate to revenue, not holding any more cash than Microsoft, and Apple is holding far less.
Why is 'revenue' the proper denominator, and not 'earnings' ?
Sure, if revenue hypothetically vanished, cash could cover it, but a lot of revenue is tied to expenses ("cost of goods sold" in the retail world), so if revenue dropped, expenses would as well.
You should be using profit not revenue (also, not all quarters are the same, using merely the most recent one is a bad practice). Measured in terms of years of profit being hoarded google is at 5 years, Apple is at 1 year, and Microsoft is at 3.5 years. No matter how you slice it that's a crap ton of money.
Apple has $140B of cash/near-cash. It just get's bucketed as long term investments because of GAAP rules.
Apple also has $15B of MBS (mortgage backed securities) on its books. Near cash it is not. GAAP is correct.
I agree with the GAAP rules, but the GAAP rules require < 90 day instruments. The complexity of rolling $140B every 90 days is insane. You are going to have days where there just isn't enough liquidity.
They are basically managing $100B in house rather than getting screwed by banks every 90 days. GAAP is right, Apple is also right, but saying they only have $40B in cash, is very misleading. They could return $100B to shareholders in 6 months with ease.
Is Apple not doing the same (I believe they started last year)?
And Dell, announced only a few days ago.
Do note that Microsoft has an ongoing $40 billion share repurchase program that's ending in two weeks.
So they're just renewing the buybacks with another $40 billion. It would actually have been a bigger deal if Microsoft had allowed the program to expire without a replacement.
From Microsoft's annual report for fiscal year 2013:
And the 2008 buyback program was, in turn, a continuation of the 2004 buyback program.
The idea behind keeping capital in the company is that the company is able to generate better returns than the shareholders could.
There's no reason why this has to be market changing, etc. Building a new factory that produces the same goods with more capital and less labour could be a use that would generate greater returns.
There are many reasons to hold capital and many reasons to dividend it.