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Published: September 20, 2010
Texas Instruments (NYSE: TXN) just got with the
program. The company announced Friday morning that it will
increase its existing stock buyback program by $7.5 billion and
modestly boost its
dividend.
Suddenly, using hefty cash balances to buy back stock or boost
dividends is all the rage in the sector, and the chip giant
wants in on the action. I took a look at this trend last week
and since it shows no signs of abating, it's time to look at all
the cash-rich tech companies to see how a stock buyback or a
dividend move would impact their stock.
I ran a screen to find the largest tech stocks that have at
least $1 billion in net cash. I then also looked at their
cash flow levels, and by combining cash and cash flow,
looked to see how much they represented as a percentage of a
company's
market value. (Did you know that nearly half of Yahoo!'s
(Nasdaq: YHOO) market value is accounted for in cash and
cash flow?)
By using this as a yardstick, companies could theoretically
reduce their share count by that percentage. For example,
eBay (Nasdaq: EBAY) could afford to buy back 31% of its
stock, and then simply let the cash balance rebound as future
cash flow pours in.
Lastly, I was curious about potential dividend yields. In the
past, tech companies usually loathed dividends because they were
a sign that management no longer had compelling uses for the
company's cash, which meant that growth opportunities were
lacking. By now, we all know that the days of high-growth have
ended (except for Apple (Nasdaq: AAPL), Google
(Nasdaq: GOOG) and a few others).
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A few companies offer paltry dividends with meager yields
(except for Intel's more impressive 3.4% payout), but all of
these companies could offer fairly hefty dividends simply based
on cash flow and leave their hefty cash balances intact.
Symantec (Nasdaq: SYMC), Dell (Nasdaq: DELL) and
Hewlett-Packard (NYSE: HPQ) could offer dividend yields in
excess of 8%. More likely, these companies would seek to have
lower payout ratios, so I looked at what kind of dividends could
be offered up if these companies paid out 60% of their annual
cash flow in dividends. For most of these companies, that would
translate into a
dividend yield in the 4% to 5% range. Not bad, but not
overly impressive either.
With coming tax changes that hike the capital gains rate on
dividends, companies may look to go the buyback route instead.
Looking at the column "cash flow as % of market cap," these
companies could look to use all of their cash flow to buy back
stock, leave the cash balance intact, and in the cases of Dell,
HP and several others, could reduce the share count by more than
10% annually. That's just what HP is doing with its
recently-announced $10 billion buyback. Microsoft (Nasdaq:
MSFT) is rumored to have similar plans afoot.
What are the implications of a 10% annual share buyback? Well,
at a minimum, it boosts
earnings per share (EPS) by a commensurate amount. So a
company that is only growing profits by +5% would see per share
profits grow by +15%.
Action to Take --> Although
firms like Dell and Yahoo have ample financial firepower
relative to their market value, I'm especially intrigued by
Symantec, which is now the largest standalone software security
vendor, now that Intel has agreed to acquire McAfee (NYSE:
MFE). The company also possesses a hefty data storage
division, thanks to a 2005 acquisition of Veritas.
Symantec's shares now trade for half the value that they traded
when that deal was announced, because the company has never been
able to derive major synergies from the two divisions. But on a
standalone basis, each of these businesses would hold real value
to a suitor, and Symantec should look to shed one and focus on
the other. Analysts seem to focus on a potential full buyout of
the company. Jefferies thinks shares would fetch $19 or $20 if
that happens, while UBS recently boosted its rating on Symantec
to "buy" with a price target of $20 under the assumption that
Symantec is "in play." But I think a sale of one part of the
business if more likely.
Even without any moves, Symantec is still quite undervalued,
trading at 10 times next year's profits, and management should
seize on that. It could buy back nearly 15% of its stock every
year simply out of cash flow. Sales growth is expected to be
flat in the current
fiscal year, but based on very recent trends, are expected
to rise more than +5% next year. That should fuel slightly
higher bottom-line growth, and when coupled with a large
buyback, could again make Symantec a real
EPS growth story.
-- David Sterman
Staff Writer
StreetAuthority |
