Rethinking Apple and Amazon – All About The Cash

This article also appeared on The Motley Fool.

Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) could not be more different in their corporate philosophies regarding profits and cash. Amazon spends almost every dime it earns, keeping the net profit down as close to zero as possible. Apple, on the other hand, keeps most of it as cash that just sits around doing nothing. As an investor, one would like some kind of balance of cash hoarding, returning that cash to investors, or reinvesting it in the business. So these two extremes make an interesting comparison considering the market reaction after earnings season: Amazon continues to rise, while Apple continues to drop.

So far, I’ve been of the opinion that Apple is a better investment, because it makes money — lots of it. However, Apple just hangs on to it, and then it does nothing for the company. Apple just started giving a minimal amount of that cash back to investors via dividends and buybacks, but not enough.

Also, Apple invests less in R&D (notice how even troubled Nokia outspent Apple) than most of its competitors. So it’s not even investing seemingly enough of its money back into its own business.

In fact, every few days someone writes an article on how Apple can use their cash better. Even I can think of a few suggestions, like doubling its dividend, becoming vertically integrated like Intel, or investing more in different lines of products or faster product update cycles. Not pursuing this latter strategy, and sticking to its guns on fewer product options, had been costing Apple market share to Android devices, which offer more size, storage, screen, and technology options.

Now, Amazon, on the other hand, has relatively little cash on hand. It chooses to invest heavily in expanding its infrastructure. Logically, the primary reason to run a business is to make money. If you are running a business for that purpose, the best thing to do with money earned would be to invest it back in the business — exactly what Amazon has been doing, and exactly the opposite of Apple. Most quarters, Amazon revenue is growing faster than the growth of overall online retail, which means it is taking market share.

Looking at both the stocks from this perspective, Amazon can look like a better investment, because it seems to believe in its business more than Apple does. Of course, Amazon is an extreme case. Most tech companies hoard cash. But almost everyone seems to be managing it better than Apple.

Just to see whether this theory held water – I made a chart looking at gross profits instead of net — because as far as Amazon goes, its microscopic net margin doesn’t seem to matter to investors. I’m generally all about the net profit, but to offer some insight into Amazon’s meteoric stock price, maybe the gross profit will work better.

Looking at the chart, Amazon looks like it is increasing revenues and gross profits, while consistently keeping constant gross margins. Amazon doesn’t look bad at all until you factor in the net income.

So Apple has Amazon beat in everything except stock price. This means that as far as Amazon is concerned, this extreme spending for expansion at the expense of current profit is desirable to investors, because Amazon is doing something useful with its cash. And that means that everybody expects Amazon’s strategy to pay off at some point. Amazon does have a lot of room to grow, which might be true considering their revenue is still only 12% of that of Wal-mart.

So even though subjectively there might be some logic to “Amazon misses but stock soars“, there is relatively less logic, looking at the chart, to Apple’s stock drop. However, looking beyond the chart. Apple can be seen as the opposite case of Amazon.

In spite of having more cash than it could ever need, Apple is losing marketshare to the plethora of Android devices. Apple possibly needs to spend more and get ahead, instead of resting on their existing laurels. So you could say that their cash is mismanaged. They have too much, and are neither giving it back to investors, nor investing it in their business.

I’m still long Apple for now, and avoiding Amazon, though. I’m not sure how long Amazon can continue making no money . It has been going at this strategy for a long time, and it is time to start making more money. Apple seems to learn its lesson, just like it did with the iPad mini. There’s still plenty of market for Apple to enter into, even with existing products.

Disclosure: Long AAPL, INTC, NOK

The Real Dividend Stocks and How to Find Them

This article also appeared at The Motley Fool.

I’m always on the hunt for good dividend payers so I try and read articles and posts on good dividend paying stocks mostly to come away disappointed with stocks paying 2% – 4% dividends. That is not good. Doesn’t matter if the dividend is growing or has been growing forever, a current yield of 2% or 3% is not what I would consider a good dividend stock.

Dividend stock lists often contain stocks like McDonald’s (3.5%), Wal-Mart (2.3%) and Pepsi (3.1%). All of them pay growing dividends and have paid dividends for a long time. Good stable companies whose dividend is not likely to reduce. But in my mind these are not “dividend” stocks. That’s like savings accounts calling 0.25% high yield.

I want yields of more than 4%, preferably more than 6% and the expectations of growing dividends. And it turns out that this is not a difficult problem at all. I simply needed more research. And here it is.

Let me start with my favorite dividend stock – Kinder Morgan. You have two options investing in Kinder Morgan — KMP (NYSE: KMP) and KMR (NYSE: KMR). They pay a dividend of 6% and 6.3%, respectively. KMP pays dividends in cash and KMR pays dividends in stock. KMP is a partnership and you have to deal with K1s at tax time, while KMR is like a regular stock. Both of these dividends are tax free until you actually sell the stock. Kinder Morgan is an MLP (Master Limited Partnership — a publicly traded partnership that is generally used by oil and gas pipeline companies) and there are several other MLPs that also pay good dividends. The industry as a whole is a good place to look for dividend payers.

Another good dividend paying stock is Verizon (NYSE: VZ) (4.8% dividend). Personally I prefer Verizon over AT&T (5.3% dividend) because as of now Verizon has invested in actually having a better network with more coverage. Also the stock has been performing better.

Another industry that pays good dividends is the Shipping Container Leasing industry. The leaders Textainer Group (NYSE: TGH) and TAL (NYSE: TAL) both pay excellent dividends of 5.6% and 6.8%, respectively.

To find these stocks I went through a stock screener looking for stocks yielding more than a certain percent and then looked up each one to see if the dividends were stable and growing, if the company actually made enough money to cover the dividends, and I’ve avoided companies and funds with complex financial business models that I don’t clearly understand.

Other dividend paying stocks I recommend are:

  • Waste Management – WM (4.2%)
  • Glaxo – GSK (5.3%)
  • B&G Foods – BGS (4.1%)
  • Transmontaigne Partners – TLP (6.7%)
  • Intel – INTC (4.3%)

in addition to the ones already mentioned in the article

  • Kinder Morgan – KMP (6.3%)
  • Verizon- VZ (4.8%)
  • Textainer Group – TGH (5.6%)
  • TAL (6.8%)

That is a good list to start with and you can always find your own gems by using a screener.

A Techie’s Guide To The Future Of Tech Stocks: Intel

This article also appeared at The Motley Fool.

This is a part of a series of articles that covers the biggest names in Technology from a dual perspective of an advanced consumer and an investor. So far I have covered Google, Microsoft, Apple and Amazon. Next up is Intel (NASDAQ: INTC).

Intel’s stock has been trading in the same range for a long time now. It feels like another stock that is just stuck. No matter what Intel does, the stock seems to be not particularly happy. Intel has been steadily decreasing float and increasing earnings per share and dividends. In fact it is one of the best Technology dividend payers with the dividend currently sitting at 4.4%. Personally any time the stock hit $19 in the last few years, I considered it a good value, even more so now with the stellar dividend.

 

 

 

Note the growing earnings especially in the last two years and the steadily increasing yield. Normally for a company doing well, the expectation would be for the yield to stay constant as the stock price rises with the rising dividend. So what is wrong here? The answer is simple. It is the perception that mobile devices are the future and Intel is losing, if not has already lost that war. Today’s mobile processors are all based on technology licensed from Arm Holdings (NASDAQ: ARMH), such as the Qualcomm Snapdragon, Samsung Exynos, NVIDIA Tegra, Apple A series, etc.

Compared to Intel’s processors, these are a lot lower power and with the current crop of quad core processors, they approach Intel in performance. Intel’s foray into mobile — the Medfield was mostly a flop with few phones with limited launches. However Intel’s single core Medfield processor was competitive in both performance and battery life with dual core Arm processors.

Things can only get better from this point. The next generation of processors from Intel will be more widespread and more competitive. The latest Windows tablets use Intel’s Clover Trail (next generation after Medfield) and unlike ARM processors are capable of running the full Windows 8, not Windows RT. It may take one or two more generations for Intel to spread processors into all kinds of phones and tablets running Android, but Intel will make it there.

Also, most tablet users will tell you that tablets do most things they need to do and they rarely need to fire up the old PC. People treat this as a negative for Intel. But the key words in that statement are most and rarely. This is where Intel has the opportunity to shine with Ultrabooks, Windows tablets and other future tablets — a competitively priced lightweight machine that can replace both the PC and the old tablet.

An article about Intel needs a mention of AMD (NYSE: AMD) just because AMD competes in the same space. However AMD is in fairly bad shape and the real competition is perceived to be shifting to cheap mobile devices and phones where Intel is better positioned than AMD. AMD does plan to build ARM based CPUs in 2014, but by that time Intel’s own CPUs should provide enough competition. Intel has the advantage of being vertically integrated and doing everything from designing to building their own CPUs that nobody has since AMD spun off its foundries.

One more reason to buy Intel is provided by Intel themselves. They are constantly buying back their own stock. In fact Intel is known to borrow money to buy back stock. I won’t argue that a lot of companies don’t buy back stock at the right time. But in the case of Intel, the stock has been undervalued for a while. In fact, the cost of borrowing to buy back stock for Intel is less than the dividend and the buybacks are reducing float. They are not just bought back and then handed to employees. The second reason to buy Intel is that Intel outspends everybody in R&D. That has not always worked (see Nokia) but in Intel’s case where semiconductor manufacturing is a very expensive proposition, it will work in their favor.

So to summarize, before PC sales decline enough to affect Intel in a significant way, Intel will be competitive in the mobile space. Also the stock pays a great growing dividend supported by a growing income. Buying on drops to or under $20 is a great way to get into Intel.

Since writing this article Intel announced future plans at CES including the next generation after Clover Trail, called Bay Trail, and Android support. More details here

Intel Buys McAfee, Why?

intelmcafeeLet’s start with the disclaimer that I own Intel Stock. After this acquisition, which I will try to fathom as I write this post, the stock is back down below the dismal level I bought it at. When I bought the stock it was with the thinking that “it can’t go lower than this” and for a while it hasn’t. Until they overpay for a company that makes a mediocre product.

I can see geeks joking everywhere that Intel bought McAfee because the bloatware that McAfee sells is second biggest driving force for CPU upgrades after Windows. And CPU upgrades are good for business at Intel. But the real reason might just be one or more of the following

  1. Diversification. Intel wants to move up from just being a hardware company, maybe?
  2. Some future in-processor security mechanism. However McAfee is not a great acquisition for that purpose. They could have bought out one of the smaller players if it were just for the security aspect. A combination of 1 and 2 is more likely to be the driver.
  3. They think adding McAfee will improve profitability down the line. McAfee has revenues of $2 billion and growing with margins of 80%. But I don’t see any common ground here where the acquisition will save costs. So either McAfee was seriously undervalued or the deal will bring major improvements to something Intel has in the pipeline.

As an investor I’m not exactly sure this is a good thing. It might be but I’m skeptical. I would have been much happier if they would have bought some smaller security vendor and thrown the Intel weight behind that to get people to move away from McAfee/Symantec instead. Intel spent more than half it’s cash on this deal. Maybe their headquarters being a stone’s throw away makes it easy to merge and form Intelton, CA.

Whatever it is, hopefully this foretells less malware in our future?

Year of the Tech Stock?

The Nasdaq is up almost 50% this year while the Dow is up almost 20%. Tech stocks are reporting stellar earnings with Intel, Microsoft, Amazon, Apple, Google amongst others all beating estimates.

If the trend continues, 2009 will really be the year of the tech stock. And it isn’t even really that much of a bubble. Many tech stocks have non stellar P/Es. They are still higher than the S&P average but maybe justified considering the performance. INTC had a dismal last year which drove it’s trailing P/E to around 50. But now it seems to be back on track and has a forward P/E of only 13.5! Google has a forward P/E of about 24, Apple about 26. Amazon has the highest amongst the P/E ratios at 46 but as long as the recession continues, Amazon will probably continue to beat expectations as more shoppers turn to online shopping for more items.

Walmart.com, my new favorite destination for online shopping with free site to store shipping and prices that often beat Amazon, even after tax and the simplicity of returning to store, great customer service also can’t seem to affect the Amazon juggernaut much.

Windows 7  is selling like hot cakes and if Windows Mobile 7 is even a thousandth as successful as Windows 7, we should see Microsoft making some headway into the Mobile market. Really the best phones are either running Android or Windows Mobile and the current iPhone has nothing on them except the App Store. Expect both Android and WinMo to catch up quickly.

What can I say, if you can stomach the risk, wait for the excitement of  the current quarter die out and get some tech stock for yourself during holiday season.

Disclaimer: Parchayi and me own AAPL, INTC and GOOG stock.