Over the weekend I published a new chart showing Free Cash Flow (FCF) net of Net Cash. This valuation metric is worth some additional commentary:
AAPL ended Friday with price sitting exactly on the ‘5’ line on that chart. That’s a 5x multiple of FCF if you subtract out Apple’s net cash position. That’s a compelling valuation level. Here’s the scenario we will examine to illustrate that. Forget buying shares. Let’s get away from the stock market and directly examine the cash flows of the company. Let’s buy the company outright. Let’s assume you were able to buy all the shares, at the then market price of 55.50 in April 2013 when AAPL last touched the ‘5’ line on my chart:
Company would have cost you $367.53B. Net cash at the time was $144.69B.
Fast forward to now (i.e. as of the most recent earnings announcement, Oct 2015):
Net cash is $141.21B. But you’d have received all the dividends and cash used for share buyback directly paid to you. That comes to $133.50B. Total net cash that you’d have now equals $274.71B.
See that? Company cost you $368B, and you’d already have $275B returned to you in 2.5 years. That leaves $93B left to go. Apple’s FCF last year (FY15) was $69.78B. So you would now be 1 year, 4 months away from getting all your investment cash back. And then you’d still own the whole company continuing to provide that cash flow to you in perpetuity.
An aside: If you add up those time periods, you’ll see that you would have broken even in about 4 years, less than the 5 years predicted. That’s because FCF has grown since 2013, and you’re getting paid back quicker. So that ‘5’ line in 2013 really turned out to be a ‘4’ because of future growth not taken into account.
Now, one might ask how could an investor have confidence in these numbers up to now and moving forward? Easy. Apple has announced it. They announced a $200B capital return program through April 2017 (which just so happens to be the end of my 4 year break even analysis detailed above). It’s all right here, including the cash numbers, in this document of Apple’s Return of Capital Timeline. In this one document they’re practically spoon feeding us this analysis.
Do you think Apple would have announced such a large capital return program if they didn’t think it would be easy to make those payments and still maintain a healthy net cash position for CapEx growth and operations? I think not.