1. The Oracle of Omaha is pleased
Warren Buffett does not heavily invest in technology companies because they carry large research and development costs. When compared to competitors within the technology industry, though, Apple’s total 2012 R&D budget is far less than competitors, especially Microsoft Corporation (NASDAQ:MSFT). However, Buffett does like companies that boast a strong balance sheet, utilize cash effectively, and please investors. Apple Inc. (NASDAQ:AAPL) fits the bill.
Last quarter it announced a $60 billion stock repurchase plan, which will increase each per share value for the outstanding stock as Apple’s stock price increases. Apple also increased dividends to $3.05 per share, a 15% increase. Buffett champions these two actions: buying back stock at discounts and offering generous dividends. CEO Tim Cook seems to be preparing for Apple Inc. (NASDAQ:AAPL)’s future while temporarily satiating investors’ appetites to stay with the company.
2. Strong cash position
As of the most recent quarter, analysts estimated that Apple is sitting on about $145 billion in cash. However, only about $45 billion is accessible because the remainder is outside of the U.S. and is subject to tax payments if brought onto American soil. So, for the first time, Apple will borrow money.
Apple will avoid paying the taxes by investing all of its overseas money outside of the U.S. and fund its stock repurchase program and dividend payments with the raised funds. Moving forward, Apple is comparable to competitors Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) in regard to credit rating. Microsoft boasts a AAA rating, while Google Inc (NASDAQ:GOOG) and Apple have an AA rating. Similar to Google’s and Microsoft’s debt issuance where they raised funds to boost cash levels and invest in projects, the capital raised from Apple’s new debt will help it forge into the future.
As seen by the firms’ free cash flow position, Apple Inc. (NASDAQ:AAPL) holds strong ground against its competitors.
AAPL Free Cash Flow data by YCharts
It is important to note, though, that Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) are heavily investing cash into their research incubators, Research at Google and Microsoft Research. The competitors hope to gain an advantage by being exposed to or discovering new, innovative ideas or solutions that will meet real world needs. Partly do to these initiatives, their R&D expense is higher and free cash flow position lower than those of Apple.
Undoubtedly, though, one reason these tech giants are all still growing is because of their healthy margins. Apple, for example, emphasizes management effectiveness by ensuring all capital is used to maximize shareholder value – as evidenced in the stock buyback and dividend increase. As its CFO said, “We continue to generate cash in excess of our needs to operate the business, invest in our future, and maintain flexibility to take advantage of strategic opportunities.” Get ready because the opportunities are around the corner.
3. Opportunities for growth
Remarkably, Apple Inc. (NASDAQ:AAPL)’s iPhone is carried by 275 companies and distributed in over 100 countries. However, as further discussed by analyst Rolfe Winkler, Apple has a “glaring omission.” Its products are not carried by China Mobile, the largest cellular provider in the entire world with over 700 million subscribers. Speculation and theories exist about potential deals, but one thing is for certain: an agreement with China Mobile will position Apple to gain massive exposure to potential customers.
Google’s Android Operating System is giving Apple a run for its money. According to mobile phone tracker Kantar, Android owns nearly 70% of the European market, a 9% increase from the previous year. However, Apple hopes that its low cost iPhone will address the threat posed by Google’s Android Operating System via Samsung, especially in emerging markets. Even though its margins will not be as large with the low cost phone, securing a foothold against Samsung will position Apple to, at a minimum, stop Google’s platform from advancing further.
Apple is also facing a potentially more powerful, efficient Microsoft. Expecting to expand into new markets and be more competitive, Microsoft continues to innovate. In fact, CEO Steve Ballmer announced that Microsoft is undergoing major a restructuring to streamline its business segments. Microsoft used to operate various business units, and many had different goals or objectives. But now, Ballmer’s goal is to focus Microsoft’s business segments and strategy so that the company can maximize synergies and therefore operate efficiently. Investors should follow the developments because Microsoft will likely come out of the adaptation swinging.
Like its competitors, Apple Inc. (NASDAQ:AAPL) is showing signs of growth as well. Numerous sources and news articles reveal that Apple CEO Tim Cook plans to debut several new products before year end. The innovation could potentially include items like a watch, tv (which I think is unlikely), and newer versions of existing products. Rumors for the new product launches could help explain Apple’s strong balance sheet – it wants to be versatile moving forward. The hype and mystery about Apple’s coming product lines hint that much more is to come.
Conclusion
The technology industry is ever changing – one of the reasons why Buffett tends to steer clear. However, profits can be made when investors recognize firms that are moving in the right direction. By generating investor value, effectively stewarding capital, and pursuing new opportunities, Apple is one such firm.
The article 3 Reasons Why You Need Apple originally appeared on Fool.com and is written by Brendan Marasco.
Brendan Marasco has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Brendan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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