What is Cash Cow

Cash cow is one of the four categories (quadrants) in the BCG matrix that represents a product, product line, or company with 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 flows over its lifespan. 

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.  Modern-day cash cows require little investment capital and perennially provide positive cash flows, which can be allocated to other divisions within a corporation.

Cash Cow Introduction

In the early 1970s, the Boston Consulting Group introduced the BCG matrix, also known as the Boston Box or Grid, which places an organization's businesses or products into one of four categories: star, question mark, dog, and cash cow. The matrix helps firms understand where their business stands in terms of market share and industry growth rate.  It serves as a comparative analysis of a business's potential and an evaluation of the industry and market.  However, some firms, especially large corporations, realize that businesses/products within their portfolio lie between two categories.  This is especially true 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 efficiently.

Defining The Quadrants

A cash cow is a company or business unit in a mature slow-growth industry. Cash cows have a large share of the market and require little investment. For example, the iPhone is Apple's (NASDAQ: AAPL) cash cow. Its return on assets is far greater than its market growth rate; as a result, Apple can invest the excess cash generated by the iPhone into other projects or products.

By contrast, a star is a company or business unit that realizes high market share in high-growth markets. Stars require large capital outlays but can generate significant cash.  If a successful strategy is adopted, stars can morph into cash cows.  Question marks are the business units experiencing low market share in a high-growth industry.  They require large amounts of cash to capture more of or sustain their position within the market.  Depending on the strategy adopted by the firm, question marks can land in any of the other quadrants.  Lastly, dogs are the business units with low market shares in low-growth markets.  There is no large investment requirement, and they don't generate large cash flows.  Often, dogs are phased out in an effort to salvage the organization.

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 flows 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.