March 24, 2012 Leave a comment
It seems that a certain eight hundred pound gorilla is having a few digestive issues. Normally we would choose to immediately seek cover. However, in this case, it would be to our advantage to stand downwind, preferably holding a very large bucket. We would be using said bucket to catch our share of the cash that this gorilla named Apple will soon begin to spew forth. After convincing consumers throughout the world that we simply could not live without its well-styled and highly-functional gadgets, Apple is now burping cash. Invoking imagery in this context is appropriate, as we seek new ways to describe this legendary and widely-reported case of corporate bloating. Finding itself with nearly $100 billion in excess cash, Apple has announced plans to to begin ridding itself of a significant portion of the excess in the form of a quarterly dividend stream and share repurchases.
One source puts the very tall $100 billion pile of cash into perspective by indicating that this sum equals the market value of all but 15 companies in the S&P. The scary part is that this claim certainly seems plausible. Now here comes the horse of unbridled irony. Once upon a time, business school professors lectured us that companies buying back their own shares were companies lacking opportunities to profitably invest in their own internal projects. Tapped out because they could no longer innovate, it was of quick-trick mentality to buy back shares to drive up the value of those shares that remained outstanding. Herein lies the irony. We would be hard-pressed to find a major company who has been more innovative than Apple over the last decade. This extremely innovative company has announced a plan that it says will shed $45 billion worth of cash over three years beginning in July of 2012.
Late-CEO Steve Jobs is said to have stood sternly against Apple using its surplus cash in this manner. Of specific significance is that he was not an advocate of paying dividends. Far from standing alone among his Silicon Valley bretheren, Jobs argued that having cash on hand to fund company operations was essential. Perhaps the memory of Apple’s rainy day indeed suggested to him the need to have this cash umbrella handy. In any case, Steve is gone after selling us quite a few iPods and iPads, not to mention having had a hand in literally changing our world.
So, it comes as no surprise that Apple’s recent announcement is raising more than just a few eyebrows. If anything, the company’s recent announcement has accelerated the unfortuntately-inevitable comparisons between Jobs and his successor Timothy D. Cook. At an October 2011 company memorial, Cook told employees that Jobs wanted Apple management to “just do what’s right“, and not to spend time figuring out what he (Jobs) would have done. Hopefully, the comparatives quickly fade as the company moves forward and does what it thinks is right, just like Jobs had said it should do.
True enough – Apple was hearing it from shareholders. Some said, “Why are we hoarding cash on which we are only earning 1%?” According to analysts, there are at least three other interesting considerations at play here for Apple. One is that simply paying a dividend opens up additional classes of investors for the company. Specifically, fund managers, who may have previously faced restrictions preventing them from investing in stocks that do not pay a dividend, will no longer face these restrictions as Apple begins to pay a dividend. At least part of this strategy is probably aimed at reducing share price volatility. The second consideration relates to taxation. Apple said that it plans to use only domestic cash to fund the plan. Stated another way, Apple apparently does not want to use the reportedly two-thirds of its cash balance that is parked outside the US. It is highly likely that the company wishes to avoid the negative tax impacts associated with the repatriation of its overseas earnings. Third, buying back shares could serve to mitigate potential dilution associated with employee share programs. Despite earnings per share calculation gymnastics, be advised that some analysts may still view this potential dilution as dilution.
Earlier this week, I received a rather timely and thought-provoking email from an Association of Financial Professionals (AFP) Editor, Ira Apfel, who was asking his Editorial Board members for our opinions on the Apple cash conundrum. I actually laughed when I read his email because $100 billion is such an absurdly large number. However, his inquiry definitely sparked my interest. It caused me to mentally revisit my own cash management experience as CFO of a middle-market company that enjoyed tremendous prosperity during better economic times. Although it was a much smaller company with just a few shareholers, it was at times all I could do to just to deal with the cash that was accumulating. Firing on all cylinders, we sometimes approached the utopic state of “printing money”. For being such a great problem to have, it can be a no-win situation. Earn too little investment return? Pay too much in taxes? Underemphasize shareholder wants and needs? Hero to bum with amazing speed and trajectory! Although there are a great many people who would like to trade places with them, CEO Cook and his CFO Peter Oppenheimer face a real challenge.
How long will it take until this gorilla named Apple again swallows too much cash? Don’t worry, people are trying to figure this one out already!
Will Apple make a major acquisition? An esteemed and tech-savvy colleague of mine says yes!
Will Apple earn so much cash outside of the US that it winds up having to pay the tax man? Vegas is probably taking action on this one as we speak!
Will CFO Oppenheimer and the company’s treasury staff be able to earn more than a 1% return on the next $100 billion? Keep in mind that a “paltry” 1% still equals $1 billion!
Attempting to answer these questions goes beyond current scope and space. Leaving these and others to Apple’s actions in coming months seems like the best way to make sure we get the right answers.