Apple’s success is staggering.
The company generated $16 billion in free cash flow this quarter, bringing their cash hoard close to a mind boggling $100 billion dollars. What the company decides to do with this huge cash balance may be key to future gains in the shares, which at current prices places the value of the company at $420 billion and making it the most highly valued company in the nation.
Computer Associates (CA), another lesser known technology company, announced that they would increase their dividend five fold yesterday – to an effective yield of 4.5% – contributing to a 10% gain by the shares today. This response might provide fresh insight into how the market would respond to other cash rich technology companies that have rarely if ever paid a dividend, but with little or no debt, could easily afford to do so. Rather than signalling the end of growth, deciding to pay a dividend could signal a vote of confidence in the sustainability of that growth while simultaneously meeting a rising demographic based need for income in a bond market bereft of yield and possessing a poor risk reward profile. (Many decades ago, it was common for stocks to pay higher yields than bonds. )
The biggest restraint on further appreciation in Apple’s shares may very well be the fact that it is already the nation’s most highly valued company. Though Apple’s just announced 73% year over year gain in revenues and 52% year over year gain in earnings mocks at the notion that the company is running up against the law of large numbers, the fact that the stock is only up 6% today in spite of such results suggests a different story may be at work. Any other company growing at such a rate – particularly any tech company – would be trading at 30x forward earnings rather than the 15x trailing earnings afforded the shares today. If Apple’s shares were to a little more than double once again (they’ve tripled in the last 30 months), it would be among the first – if not the first company – to approach a trillion dollar market cap. Key to breaking upside resistance might be the prospect of sharing some cold hard cash with a market that is increasingly starved for yield.
Crazy good. So crazy good that Apple would rank among the world’s largest country’s if it were viewed as such and also, we might add, rank among its most solvent. (See below.)
(Incidentally, if you missed the New York Times article on Apple and China earlier this week, it’s worth a read. Given how many pension systems and 401k plans own the shares, I think Steve Jobs and company have done plenty for this great nation of ours.)
Disclosures: Please note that Broadleaf Partners, LLC currently owns shares in Apple Computer for its clients and reserves the right to change its opinion or position on such shares at anytime and without subsequent notice or disclosure. This blog post is not to be taken as a recommendation of Apple shares.