Apple (NASDAQ:AAPL) is well known for its huge cash pile. It’s often considered one of the most cash generative companies in the S&P 500. Unfortunately, Apple is also famous for not returning cash to shareholders. Indeed, for many years the late Steve Jobs insisted that the company should not pay out a dividend in order to save cash.
Apple isn’t alone in being a highly cash generative company with no debt. The three stocks that I have picked today are prime examples of highly cash generative companies that currently have no debt and positive cash balances, and the majority of their shareholder equity is cash. They are very stable companies with solid balance sheets and, of course, plenty of scope for cash return to shareholders.
The first company, and the one with the biggest cash balance as a percentage of shareholder equity, is Mastercard Inc (NYSE:MA). MasterCard operates a payment network, which links customers, banks, and retailers to each other. The company skims a fee off each transaction to pay for its services. It also makes money from fees that retailers pay for monthly access to the network.
MasterCard’s operations are highly lucrative. Of course, the company had to spend a lot of cash to get the network up and running, but now it has cash flowing in from every direction.
| Metric | 2010 | 2011 | 2012 |
|---|---|---|---|
| Cash flow from operations | $1,697 | $2,684 | $2,948 |
| Free cash flow adjusted for acquisitions | $1,633 | $2,547 | $2,119 |
| Cash conversion ratio | 96% | 95% | 72% |
Figures in millions.
Mastercard Inc (NYSE:MA) is more lucrative than its competitor Visa Inc (NYSE:V). It carries out more international transactions than Visa, which have a significantly higher average size and bigger fees per transaction.
MasterCard’s free cash flow adjusted for acquisitions has grown 534% since 2008, and net operating cash flow from operations has grown 600%! The company’s cash conversion ratio has on average been around 90% for the past five years.
As for MasterCard’s rising cash and shareholder equity:
| Metric | 2011 | 2012 |
|---|---|---|
| Cash as a percentage of total equity | 95% | 94% |
Deducting liabilities from assets gives shareholder equity, or total equity. Mastercard Inc (NYSE:MA)’s total equity is rising quickly, in line with its growing cash balance, as the company has almost no liabilities. On average, after the deduction of liabilities, MasterCard’s cash balance accounts for 90% of total shareholder equity.
Currently, out of MasterCard’s $530 share price, $40 is cash, giving a forward P/E ratio after the deduction of cash of 16.1.
The company’s quickly rising cash balance gives plenty of scope for additional future shareholder retuns.
The medical-device maker that’s always in demand
Intuitive Surgical, Inc. (NASDAQ:ISRG) is a medical-device manufacturer, and its products are always in demand. The company has a gross margin of 70% and a net profit margin of 30%.
| Year | 2010 | 2011 | 2012 |
|---|---|---|---|
| Cash flow from operations | $528 | $678 | $814 |
| Free cash flow adjusted for acquisitions | $432 | $595 | $672 |
| Cash conversion ratio | 82% | 88% | 83% |
Figures in millions.
Intuitive Surgical, Inc. (NASDAQ:ISRG) is converting, on average, 80% of its net operating cash flow into free cash — not as high as Mastercard Inc (NYSE:MA) but still very impressive.
