The importance of consistently returning more and more cash to shareholders cannot be overstated, according to Bernstein Research analyst Toni Sacconaghi, who recommended in a research note on Wednesday that Apple (NASDAQ:AAPL) use a combination of ways to do so in the near future.
Sacconaghi compared the performance of IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) over a five-year period to make his point, noting that the former’s generous cash-return policies had helped it achieve a much higher level of stock price growth.
“IBM produced an 80 percent relative return (77 percent absolute) from 2007 to 2012,” the analyst wrote in his research note. “Microsoft produced a relative return of negative 22 percent (negative 25 percent absolute) from 2007 to 2012. Why did IBM, with lower growth and margins, outperform Microsoft by such a significant amount?”
According to Sacconaghi, while part of the reason was that the Windows maker began with a higher multiple, 19.1 times versus 12.2 times, there was another important driver of the disparity in stock performance: capital allocation.
“IBM has returned 109 percent of its free cash flow to investors during the period (with buybacks significantly boosting earnings per share), while Microsoft has returned 63 percent (and much less in the last two years),” he explained.
Sacconaghi recommended that Apple learn from the ways of IBM and from the mistakes of Microsoft in order to help its shares keep performing well…