Apple Has Too Much Money

Hugh Pickens writes "AP reports that last week during a question-and-answer session at the company's annual shareholders' meeting CEO Tim Cook said he believes Apple has more money than it needs and his next challenge is to figure out whether Apple should break from the cash-hoarding ways of his predecessor, the late Steve Jobs, and dip into its $98 billion bank account to pay shareholders a dividend this year. 'Frankly speaking, it's more than we need to run the company.' The question of how to handle Apple's cash stockpile is a touchy one, partly because company co-founder Jobs had steadfastly brushed aside suggestions that the company restore its quarterly dividend which Jobs suspended in 1995 when it was in such deep trouble that it needed to hold on to every cent to keep from going bankrupt. Marketwatch analyst Mark Hulbert writes that a compelling case can be made that a huge cash hoard actually represents grave danger for Apple. That's because too much cash often burns a hole in managers' pockets, and they end up doing a poor job of investing that cash—engaging instead in foolish pursuits like empire building. Hulbert adds that a good strategy for ensuring that Apple remains a hungry, growth-oriented entrepreneurial company might be for it to distribute much of its cash to shareholders."

Comments

The stockholders can't afford a dividend

[KYPackrat]

Apple has $90 billion in actual cash value, but it couldn't offer most of it in a dividend.

Why? Most of that $90 billion is held offshore. To offer a dividend, Apple would have to repatriate that money, and that will kick in an automatic tax (about 30% off the top). Then, to issue the dividend, Apple pays another tax. Also, the income is taxable capital gains for its stockholders as well. By the time Apple stockholders take the dividend to the bank, they're down to somewhere around 20% of the original cash.

If Apple wants to reward stockholders, it could buy back shares overseas. Normally, I hate stock buyback plans, but this is one of the few times it would make sense.

Re:The stockholders can't afford a dividend

[tomhath]

I hate stock buyback plans, but this is one of the few times it would make sense

It's worse that that. The stock price is so high because investors expect the company to be profitable in the future; but if those profits are never distributed to the stockholders then where's the value? In order to be worth the current price the investment has to pay some return (ignoring the dot-com type of speculation that drives up the price of a company's stock before it comes crashing down as we saw in the 90's).

If Apple distributes the cash as dividends the stock price will (probably) drop in proportion to the amount of money that's distributed, unless stockholders think there's potential for even bigger profits and another dividend in the future.

Re:Another fly on the wall heard from

[Junta]

That list is pretty terrible criteria for 'successful'.

One, its mostly data from over a year ago.

Two, the revenue numbers don't correlate well to each other as they represent different dates and different fiscal calendars with different companies being impacted by various degrees economic conditions changing over time.

Three, revenue is perhaps one of the weakest indicators of 'success'. If you get 1 trillion in revenue but had 1.1 trillion in expense, you are the worst company in the world practically speaking but would be number one in that list. By profit, Apple is likely easily in the top10 (data I could find put them at #8 in 2010, but a lot has changed since then). By Market cap, Apple is 487 billion, with Exxon at 413 billion, which is a strong indication of how valuable a company is perceived.

Apple's management doesn't know either.

[Anonymous Coward]

But everyone with a soap box seems to think they know better than Apple management how the company should be run.
If they are really that smart go start your own company and beat Apple at it's own game.

They don't know either.

If Apple's management were such geniuses, then why don't they take that cash and start another business line that will make them even more successful?

Or for a bad idea, buy a company that will add to their business - like Intel? (Using cash for acquisitions almost always turns out to be a bad decision. )

Sitting on a load of cash is a sure sign that management doesn't have any good ideas in the pipeline to keep the business growing and the company is headed towards stagnation.

It happened to Microsoft.

Re:Apple's management doesn't know either.

[thesandtiger]

"If Apple's management were such geniuses, then why don't they take that cash and start another business line that will make them even more successful?"

By and large that's actually what Apple has been doing. To wit:

- They were a computer/software maker and started making money doing that thanks to the iMac. So, they:
- Started up the iPod business selling music players that were pretty easy to use and fill up. So they:
- Started up the iPhone business, selling phones that were pretty neat along with apps that can be used to fill 'em up. So they:
- Started up the iPad business, selling tablets that were pretty neat compared to anything out at the time, along with even more apps that can be used to fill 'em up.

The problem for them is figuring out what the next "So they" should be. In my opinion, unless they have some really amazing stuff hidden (like AR glasses or something similar), I don't see them having an easy time bringing out yet another class of "must have" gadget.

But I could see them essentially buying up huge chunks of content - music, movies, television catalogs - in a way that gives them complete and total control over how they are able to run the content part of iTunes.

I could see them trying to set up their own cell/data provider, starting with the most advanced networks they could.

The problem with those would be that, given the way Apple has historically handled negotiating with the content providers and their network carriers, Apple made the lion's share of the profits and had the relatively easy part while the providers and networks made money but had to deal with the more difficult parts (like provide service).

I could see them doing something like taking a lot of that money and starting up their own idea incubator - they have a LOT of very smart people working for them and wanting to work for them - and just basically being a venture capital group. That's been done before, of course, but I could see Apple trying to do it again, but this time "right" since that's one thing they tend to do well.

As for what such a load of cash is a sign of - I think in Apple's case it's more a sign that they REALLY didn't anticipate the level of success that they had. Usually in business it's a very good idea to plan for as many failure modes as you can think of as well as how to build on successes, but most people don't go, "Gee, and if we sell 20x as much as we think we could we should buy everyone ponies and have free ice cream day!"

If they were completely out of ideas, I don't think we'd see Tim Cook walking around saying "We're trying to think of the best way to handle this" - I think he'd be flat-out lying and saying "We have amazing things in store for these funds" while trying desperately to see if there's anything "magical" they can pull out of their asses.

Re:Another fly on the wall heard from

[Hadlock]

Didn't Tim Cook take over day to day operations of Apple in 2006? Steve Jobs was always the official CEO, but Steve had been grooming Tim Cook for almost half a decade when he finally stepped down. Most of the decisions made in the last six years have been, in part, made by Tim Cook.
 
I don't think you really know what you're talking about when you say things like "So far, Tim Cook hasn't really done anything significant one way or another and has been kind of 'coasting' on the companies success." when in actuality he has been running the company for 4+ years.

eh

[buddyglass]

I know they get criticized for it, but until there's a shareholder revolt and/or people stop buying the stock (fat chance), I don't see the "need" to pay out a dividend. Apple could instead do one or more of the following:

1. Lower its profit margins and steal even more market share from its competitors. Tons of people already buy Apple products; imagine if they were that much cheaper.

2. Hire an even more talented workforce by offering "way above market" pay. Establish a threshold like 10%. Fire the lowest performing 10% of Apple employees. Technical, design, sales, the whole nine yards. Then give everybody who's left a 25% raise. Then fill the vacant positions with "superstar" caliber replacements. (Note: it shouldn't do this unless it's confident it can accurately gauge employee performance.)

3. Get into a market it doesn't yet play in and dominate it. This with the understanding it will incur a short-term financial loss. Prior to the iPhone's release, who would have ever thought the most popular phone in 2012 would be from Apple? Not me.

cure cancer

[backslashdot]

They could spend 50 billion of it on curing cancer. You know, I wondered why Steve Jobs didn't do that .. I kept putting off writing to him to tell him to do that -- I now regret that. All he had to do was get all the world's top cancer scientists together to work on the problem in a focused way. He did that with computer animation and it worked. He did that with smartphones and it worked. Why can't it work for cancer or for regenerative medicine (growing new body parts)?

And yes, it would be massively profitable .. they can charge the equivalent of 1 or 2 years of chemotherapy for the cure. The insurance companies would gladly pay for it (it'll be cheaper than paying for 3-5 years of various expensive chemotherapy drugs and tests that the average cancer patient needs).

They would get their invested money back within months.

Re:how much could i pay you to justify

[UnknowingFool]

In regards to #2, some of these factories are in the middle of nowhere because the land was cheap. If the companies didn't build dormitories, their workers would have had no housing as the factories were built so quickly that the local area has not been able to keep up with residential construction. This is the same reason some of the factories are mini-cities. There really isn't any place for the worker to eat or shop. Cars are not the norm in China so most workers can't just get in their car and drive to the nearest town for supplies and housing. Now if you don't build these amenities, your competition is ready to do so and get workers and the contracts you wanted.

Re:Another fly on the wall heard from

[Junta]

There are two aspects, reality and perception.

For reality, it's hard to say. Through the end of 2010, all choices had to go through Jobs. Even if you can fairly say Cook 'made the decision', Jobs had final say and might have even vetoed some moves we never heard of. It seems unlikely that Cook was operating fully indpendently.

In terms of perception, Jobs was undeniably CEO until 2011 and his name was attached to all of the right decisions, whether earned or not. Without Jobs, the shareholders may be putting quite a different set of pressures on Cook. Even absent of that, I would expect Cook not making decisions conscious of how Jobs would think of them, rather as official CEO or as chairman of the board. It might be a full year before the body of shareholders and management really start showing how they will be different or not in a post-Jobs world.

Re:Greater fool

[Anthony Mouse]

The problem is you're playing the greater fool game. If you intend to make money by selling a stock at a later date, then what you're saying is that you think you can find someone willing to buy AFTER you got the value out of it. Your buying strategy is also then based on inside information, "intuition" or some other divine insight, otherwise people would have already known and driven the price up. Another downside is that you have to actually SELL your assets to get any money from them.

That's not how it works. The stock price of a company has at least some relationship to the value of the company -- certainly it will almost never fall substantially below the liquidation value, because if it ever falls below it, there are plenty of vultures who will swoop in and buy it for just under that amount and then liquidate the assets at a profit.

So if you buy a stock for $100 and it goes up to $120, that is usually because the company is now worth more money. They might have more money in the bank, or their products might be more popular in the market and the expected future profits are higher, etc. The person who buys it is not (necessarily) a sucker -- they're buying something ostensibly worth $120 for $120.

What you're probably referring to is the efficient market hypothesis, which basically says that the risk-adjusted return for any stock is the same, because if it wasn't then market participants would sell stocks with lower risk-adjusted returns (thus lowering their price) and buy stocks with higher ones (thus raising their price), until the risk-adjusted return for both stocks is the same. (The ironic thing about the efficient market hypothesis is that it only works if market participants assume it isn't true -- because if people assume it's true it encourages people to be lazy in evaluating bargains and then it ceases to be true; but since they generally don't assume it's true, it tends to be true. Another way of saying this is "people who trade stocks on the basis of the efficient market hypothesis are suckers.")

But that doesn't have anything to do with whether someone who buys at a higher price is getting a better or worse deal. Stocks with higher volatility (like a lot of tech stocks, because fortunes change overnight in this industry) tend to have higher returns when they're doing well, because the probability is higher that you'll see losses than you will if you buy e.g. Walmart. In other words, the returns can be higher with Apple because the risk is higher which makes the risk-adjusted expected returns the same for both Apple and Walmart (and, if you buy the efficient market hypothesis, all other securities). There is no reason to expect that you'll do better buying Apple vs. Walmart, regardless of their past performance or anything of that nature ("past performance is no guarantee of future results"), because if there was any reason to expect that then the respective prices of those stocks would almost immediately change to reflect it and it would case to be the case.

The point being that if you buy a stock and then later sell it for a higher price, neither you nor the buyer are necessarily suckers. You just have different valuations of the value of the stock -- and the difference may be very small. If you think it isn't worth more than $100 and someone else thinks it's worth $100.20, you aren't having some great existential disagreement about the future of the company. You're disagreeing about whether the future risk-adjusted returns will be two tenths of a percent higher or lower and comparing that favorably or disfavorably with the risk-adjusted returns for other investments (which will be in the same range).

The old school way which is now gaining popularity again is to buy companies that pay dividends. This gives you a return without finding a fool to sell to or cashing out. It's how it's supposed to work. If the stock goes down, it's not even relevant unless they cut the dividend (there is eventually a c