How Should Apple Spend its $76B Treasure Chest?
With an incredible $76.1 billion in cash stacked on its balance sheet, Apple (NASDAQ:AAPL) is making so much money it literally doesnt know what to do with it all -- its excess funds exceed the gross domestic products of 126 of the worlds 195 countries.
While most companies return extra cash to shareholders via dividends, fast-growing tech companies traditionally hoard it for expansion opportunities and rainy days, like the 2008 financial crash.
Still, the eye-popping amount of cash in Apple's treasure chest, which includes short and long-term marketable securities, has fueled rampant speculation about what CEO Steve Jobs should do with it all.
Because of the size of the figure, and the fact that Apple has historically shunned large-scale acquisitions, few people buy Jobss argument the company wants to keep our powder dry for very strategic opportunities that may come along.
I dont know what they are planning to buy other than a European country, said Roger Kay, president of Endpoint Technologies Associates.
Apple did not respond to a request for comment.
Apple Money Management?
To be sure, the cash stockpile is a reflection of the enormous success Apple has achieved. And its hard to gripe about Apple not returning cash to shareholders because of its stock performance.
Since sinking to $82 in November 2008 during the economic meltdown, Apples shares have surged 387% and even crossed over $400 this week. Apple, which may soon pass ExxonMobil (NYSE:XOM) as the largest U.S. company by market cap, is so hot it has even outperformed gold over the past 12 months.
Still, Apples cash stockpile is growing and may soon cross over $100 billion as it continues to smash records. At the end of last quarter, cash and marketable securities were up 15.8% quarter-over-quarter and by 66.2% from a year earlier. Yet that cash is earning very little simply sitting on Apples balance sheet, and technically it belongs to shareholders.
I didnt hire Apple to be my fund manager, said Kay. It begins to distort the portfolio of Apple financially. Theres so much cash it becomes a distraction.
Historically, tech companies have been reluctant to return cash to shareholders via a one-time or recurring dividend. Thats because they still consider themselves relatively young in the business cycle.
New companies tend to use extra funds to reinvest and plan for the future by making acquisitions, updating supply chains, spending heavily on research and development or luring high-priced talent.
Apple Resists Shelling Out Dividend
Of course, Apple isnt alone in hoarding cash. U.S. non-financial corporate cash holdings jumped 11.2% to $1.24 trillion at the end of 2010 despite rising capital expenditures, shareholder distributions and M&A, Moodys said on Wednesday.
Tech companies are no exception. In fact, four of the five companies with the largest stockpiles reside in and around Silicon Valley.
However, at $76.1 billion, Apple is holding far more cash than its peers. According to the most recent corporate filings, the amount of cash and marketable securities totals $35 billion at Google (NASDAQ:GOOG), $43.4 billion at Cisco Systems (NASDAQ:CSCO), $52.8 billion at Microsoft (NASDAQ:MSFT), $28.9 billion at Oracle (NASDAQ:ORCL) and $11.8 billion at IBM (NYSE:IBM).
With the exception of Google, all of those companies pay dividends, unlike Apple.
Because of its exceptional growth and fierce brand loyalty, Apple doesnt face the same pressure as a company like Microsoft, which has seen its stock price go virtually nowhere for the past nine years, but pays a dividend yielding 2.3%.
Apple is in this position of vanity where it doesnt have to buy anyones favor and doesnt feel the need to pay up a dividend, said Kay.
Apple likes to have a substantial amount of cash just in case there is an Armageddon D-Day type of scenario, said Clyde Montevirgen, an analyst who covers Apple at Standard & Poors.
Montevirgen said that while we dont think its necessarily the wisest use of cash, we dont think the cash policy will change in the next one to two years. In general, Montevirgen said he prefers companies in Apples cash position deploy that excess cash for an ongoing or one-time dividend or even a stock buyback.
Will Apple Unleash its Treasure on M&A?
The cash stockpile at Apple has led to speculation about the company swallowing up a small or even large tech company. It clearly has the resources and balance sheet to buy almost any of its competitors.
In fact, reports have swirled this month that Apple is in talks to acquire Hulu, the online TV service owned by media giants Walt Disney (NYSE:DIS), Comcast (NASDAQ:CMCSA) and FOX Business parent News Corp. (NASDAQ:NWSA). Some believe Apples involvement may be aimed at driving up the price for Hulu, which could be worth $2 billion.
Yet, besides a few smaller companies that are part of its supply chain, Apple rarely makes big buyouts because it prefers to grow organically and realizes new companies could cause headaches and cultural issues.
Weird other things would just gum up its operations, said Kay. One thing about Apple is, its very minimalist.
That contrasts with Microsoft, which has not been shy in deploying its funds to leap into costly new initiatives like search and video games or buy companies, such as the pricey $8.5 billion takeover of Skype this year.
Broadband and Patent Buys Ahead?
There is no shortage of out-of-the-box ideas for what Apple should do with its cash stockpile.
Ross Rubin, director of industry analysis at NPD Group, suggested Apple invest in a new technology to provide high-speed wireless broadband or a group of solutions aimed at providing global broadband coverage.
Clearly today Apple owns just about every part of the customer experience except for the wireless service, said Rubin. Apples iPhone service is provided by AT&T (NYSE:T) and Verizon Wireless.
While there has been buzz about Apple getting into the broadband game, that would stray far from its strengths and dip into the dicey politics of telecommunications.
The chances of that happening are between zero and less than zero, but there will always be rumors about it, said Jon Rettinger, president of tech blog TechnoBuffalo.com.
Instead, Rettinger suggests Apple put pressure on its rivals like Google by acquiring more patents like the $2.6 billion it spent to buy patents from Nortel. Its not clear what other patents would be on the market if Apple opens its pocketbook.
Apple could also use its money as a weapon by stockpiling components needed for electronic devices, Rettinger said. This strategy, which Apple has already reportedly implemented by filling big orders with LG and Toshiba, is aimed at simultaneously securing low prices and hindering the competition.
Its a bully move but its well within Apples rights to do so, said Rettinger. It can make Apple the winner by default.
At the end of the day, these efforts will only put a small dent in Apples $76.1 billion of cash holdings.
Thats why Kay believes Apple will eventually follow in the footsteps of its tech peers and pay a low-yielding dividend like Intels 3.5%.
Kay said, Its more evil to pollute the company with stupid acquisitions than it is to give away some of the money. At some point, this just gets absurd.