I don’t believe we have seen a company generate so much cash in such a short period of time quite like Apple. Each earnings report we see the bank overflowing with cash, and each earnings report seems to frustrate investors and the crowd because the company does not do ‘something’ with that heavy stash of cash. Everyone seems to have the answer and wants to tell them what to do. At last look the total stood at more than 130 billion and this is AFTER last year’s special dividend, small buy back and initiation of a regular dividend. Yet with all that firepower it seems to upset the crowd. What on Earth could they be saving this for?
As it is, the cash on the balance sheet astonishingly exceeds the market cap of 94% of the names in the SPX 500 index. That is higher than 470 companies. So, we applaud Apple for being a great innovator of products, having excellent timing for releases and hyping their iPhones, iPad and iPods and for being prudent and conservative with their cash. Historically that is how it has been with Apple even before this more recent decade of dominance. If we look back in the 80′s and 90′s when the company was struggling to keep up with product innovation they always had a decent stash of cash on the balance sheet. So today’s inaction with the cash is nothing new to Apple.
Yet, when is it time to stop hoarding and start thinking about alternatives? At the risk of sounding biased I would like to present some ideas (many that have already been heard over and over again) inclusive of what the company is already doing, but not trying to derail any plans (they won’t listen to me anyway!).
- Keep building the stash, a prudent and conservative way to value the company. Growth is slowing and that cash build will also slow down. Cash in the bank can never be entirely criticized. Even though it’s not ‘earning’ anything per se it acts as a tremendous cushion and buys a tremendous amount of time for the next innovation cycle to come out (if there is one).
- Share the wealth – increase the dividend or another ‘special dividend’. The shareholders own the cash and if Apple cannot figure out a way to create a return better than zero then it should return it to shareholders.
- Acquire some companies aligned with their future plans or exhibiting growth. Paying cash to acquire firms is always a risky proposition and requires some difficult due diligence. There were many companies in the 90′s who used their stash of cash to make some very poor acquisitions, Excite@Home was one of these when they bought BlueMountain Arts (subsequently @Home went into bankruptcy, their network was acquired for pennies on the dollar by AT&T).
- Buy back shares. This strategy is potentially more tax advantageous now for shareholders rather than paying a dividend (tax changes). The company could shrink the existing share count significantly, further reducing a low p/e multiple. The problem here lies in the growth of the company, as no matter how you look at it they have been slowing down. So, a share buyback may entice a value investor to step in but that won’t keep the hot money satisfied – who is looking for strong earnings growth.
- Invest in new growth products. This is the one black hole investors are wondering about. Is there something new and big on the horizon? If so, when will we hear about it or see it? Apple is one of the most secretive companies there is so it is difficult to dismiss anything new is coming. They will show us something when the time comes. The heavy cash affords the time.
I’m sure there are other things that can be done like splitting off a division, creating more value or buying a massive company like Facebook or even Yahoo or Twitter. We can only speculate but I trust management will do the right thing by shareholders. After all, most of the key players have been around since the start of the Apple decade. Let’s see what’s in store for the future.