Apple leads Microsoft, Google in use of Retained Earnings
Disclaimer: Author is Long Apple (AAPL) Inc.
Using our quick and dirty analysis of retained earnings, Apple (AAPL) Inc holds a very large lead over Google (GOOG) and Microsoft (MSFT) in yet another category. Data calculated over the last 5 years using trailing twelve months for current year. Retained Earnings is a calculation of the sum of retained earnings minus any dividends paid and the growth of earnings. A companies use of retained earnings is very important because if it can't earn an excess return it should return them to shareholders instead of wasting the money.
|Company||Rate of Return on Retained Earnings|
|Apple Inc (AAPL)||30%|
|Google Inc (GOOG)||12%|
|Microsoft Corp (MSFT)||7%|
What does this mean exactly?
For every dollar that Apple Inc has kept and not returned via dividend it has managed to earn 30% on that dollar, while Google and Microsoft have earned far less. Warren Buffett has recommended that a company at least earn $1 for every $1 retained every 5 years, or 20% per year. Apple provides a premium to this while Microsoft and Google do not.
The key is Apple hasn’t made costly acquisitions
While many clamor for Apple to purchase a Tesla Motors (TSLA) or even CNBC saying that it should have been the one to buy WhatsApp. Apple Inc (AAPL) is a much more focused company with focused goals. Google and Microsoft have both spend much more on acquisitions and research & development, and while it seems great at the time the results have not been good.
Apple has been a very disciplined tech company and hasn’t wildly purchased companies like aQuanatitive, Skype, Nokia, or Motorola. This shows in return on equity and in their use of retained earnings.
So far the acquisitions haven’t helped
While, anyone would tell you not to judge these moon shots or acquisitions over shorter periods of time, the fact of the matter is they have been a very costly reality of business for both Microsoft and Google that shareholders often cheer when they should be very critical.
Acquisitions are an expensive form of R&D in Tech
While research & development and merger announcements play very well on Wall Street as Google has found. Google has yet to convert many of these moon shots into anything but fancy headlines. For all of Google’s innovations Search is the one product that brings in the bacon and carries all these subsequent investments. Many of these purchases for Google are seen as a form of protectionism, which is a hidden cost of protecting their business model.
Being first is important but only if you can capitalize
Apple and Microsoft know that being first doesn’t matter very much if you can’t properly capitalize. Xerox PARC was first in graphical user interfaces and Microsoft had a huge advantage over both Google and Apple in Mobile.