What is 'Cash Cow'
Cash cow is one of the four categories (quadrants) in the BCG growth-share matrix that represent the division within a company that has a large market share within a mature industry. A cash cow can also refer to a business, product or asset that, once acquired and paid off, will produce consistent cash flow over its lifespan. A cash cow requires little investment capital and perennially provides positive cash flows, which can be allocated to other divisions within the corporation.
BREAKING DOWN 'Cash Cow'Cash cow is a metaphor for a dairy cow that produces milk over the course of its life and requires little maintenance. A dairy cow is an example of a cash cow, as after the initial capital outlay has been paid off, the cow continues to produce milk for many years to come. These cash generators may also use their money to buy back shares on the market or pay dividends to shareholders.
Cash Cow Introduction
In the early 1970s, the Boston Consulting Group introduced the BCG growth-share matrix that puts companies in one of four categories: star, question mark, dog and cash cow. Some companies are large enough to have business units that take on the characteristics of one or more of these four categories. This is especially the case with product lines at different points in the product life cycle. Cash cows and stars tend to complement each other, whereas dogs and question marks use resources less efficiency.
Defining The Cash Cow
A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of market and require little investment. For example, Apple (NASDAQ: AAPL) is considered a cash cow because it has established a well-defined niche in wireless gadgets. Different product lines within Apple generate cash for other lines of business at the beginning of their life cycle. By contrast, a star is a company or business unit that operates in a high-growth industry. Question marks are the problem child of the BCG growth-share matrix. They operate in high-growth markets and require capital to grow, but the probability of success is unknown. Dogs don't require much cash, but due to age, tend to suck up large portions of capital.
Finding A Cash Cow
Cash cows, such as Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTL), provide dividends and have the capacity to increase their dividend due to their ample free cash flow calculated as cash flows from operations minus capital expenditures. These companies are mature and do not need as much capital to grow. They are marked by high profit margins and strong cash flows. Cash cows can also be slow-growth companies or business units with well-established brands in the industry.