Corporate cash and Apple

Apple alone represents $64 billion or 36% of the total $179 billion increase in corporate cash since 2009. And in 2011, overall corporate cash would have actually declined by $6 billion had it not been for Apple’s $46 billion increase.

…Supported by our expectations that consumers worldwide will continue to feast on Apple products, we expect overall corporate cash and its concentration will increase in 2012. Apple alone could represent 12% of total corporate cash, about three times more than the next cash king. …

There is more here, and I thank Brian Bares for the pointer.


I wonder if Apple, a decade from now, will join Microsoft and others in essays about how companies destroy shareholder value by not simply distributing profits via dividends/buybacks and instead investing it in efforts that will ultimately not beat market return.

(Yes, Apple looks like a money-machine that can do no wrong profit-wise - but so did Microsoft.)

I was thinking the same thing. What do they have against dividends? Hoarding cash doesn't do anybody any good.

But what good does paying out cash dividends do for Apple?

Apple is only as good as its required rate of return.

Looks like they agree with you. Apple announced over the weekend that it will begin giving dividends to shareholders.

Also, Microsoft has been paying dividends and increasing them annually since 2005. I suspect Apple will increase theirs similarly each year. And someday Google will too. It's a pretty standard cycle for large tech companies.

I was about to attempt a rebuttal, but now that I think about it you're probably right. Microsoft had so much cash that it chased Google and other innovators with bottomless money pits like Bing.

Meanwhile Facebook and Twitter were hacking out game-changers with small teams. When it comes to innovation excess cash can often work against you.

BTW, who's the "next [nearest] cash king", mentioned in the post, anyone know? Microsoft?

Apple: 97 billion
Microsoft: 51 billion
Cisco: 46 billion
Google: 44 billion

Cisco was a surprise. Then again, I'm no expert.

Apple was at $97 billion at the end of FY2011, they are well beyond that now.

I don't think cash works against innovation. It's probably more correct to say that innovation (a) has little to do with own holdings of cash and (b) has little to do with past history of innovation. Anecdote plural data and all that.

So, robbing Apple makes more sense now than robbing banks.

I ask this sincerely:

How is returning money to shareholders via dividends "robbery"?

This is not the interpretation that I had suggested.

The question is whether shareholders entered into a contract with the company in order to obtain dividends, and what those terms are.

The evidence of behavior, our laws, and our tax code, suggest that no - investors buy stocks for appreciation in value.

The idea that shareholders 'own' a company is an antiquated fancy, and little more.

Our tax code does have an "accumulated earnings tax" that imposes a double helping of corporate income taxes on corporations that retain income without distributing it under certain circumstances. It is rarely invoked, but it is there.

Are there any rigorous market-oriented proposals for reforming corporate governance? Maybe there isn't a better system than what we have but it sure seems like there should be.

If anyone has links to books or papers I'd be interested.

Is hoarding cash a failure of corporate governance? If so, how come their shares aren't falling? Apparently the shareholders are OK with the strategy.

That's not really proper reasoning. They've been hoarding cash gradually so there's no single event where you could point to movement in share prices and say that that's a market response to their cash hoarding strategy.

I actually think it's fairly uncontroversial to state that this policy is depressing their share prices. That is the same as saying that a decision to pay a dividend would lift their share price, which I think most people would agree with.

>>>would lift their share price<<<

Do you mean the sharp spike post announcement or lasting gains? Is there research showing lasting gains in stock prices to companies declaring dividend?

eh? The point is not the stock price, the point is the total return to the owners of the company. If they declared a $1 dividend the stock price might well fall $0.95. This should not be considered a failure.

There are studies showing that companies that routinely pay dividends have stock+dividend returns greater than comparable companies that don't have dividend payments.

Just look at your computers today. Apple just declare a dividend, first in its history. The stock is up 2%.

This doesn't seem very confusing to me. There are two choices: return the money to shareholders via a dividend, or hoard the cash in case you might one day need it. The choice is usually made in terms of which one is more likely to increase shareholder value (i.e., which one is more likely to make the stock price go up). The tech world can change quickly. Apple, by sitting on their giant cash hoard, is better that they are going to be able to spot a market opportunity someday, and that the odds of doing so (and raising stock price in that manner) are greater than whatever payoff the stock price my get by issuing a dividend.

The issue seems to get even less confusing if you buy into the argument that, during the Jobs era, Apple could care less what their stock price was and is making its decisions solely from the position of the company's well-being (effectively believing that the company's well-being and the share-holder's well-being are one and the same, or that the share-holder's well being is irrelevant, or whatever).

I am not sure what corporate governance has to do with anything here. Apple's corporate governance structure, like most corporations, effectively means that if a small group of shareholders control a certain stake in the company, they get to exclusively decide what to do. The rest of the shareholders have to come along for the ride. But I have trouble understanding the validity of an argument that would go something like "30% of Apple's shareholders want some of that cash, so they should have some right to it". I am not exactly sure what kind of "minority rights", or "protection against the tyranny of the majority" could or should be put in place in the corporate sphere.

Apple, by sitting on their giant cash hoard, is betting that they are going to be able to spot a market opportunity someday, and that the odds of doing so (and raising stock price in that manner) are greater than whatever payoff the stock price may get by issuing a dividend.

If you believe in EMH, then if issuing a dividend raises the stock price, that means that it is the better thing to do. I'm not saying I do (I don't have strong opinions) I just wanted to point that out.

I think, this reasoning makes sense only up to a point - Apple could buy Facebook outright with cash right now, or they could buy 20 5 bil. USD shops right now - how many opportunities might there be, and how expensive would they be to require this large an amount of cash?

Practically speaking they couldn't actually buy Facebook with cash.

There's a third choice, which is to return value to shareholders by buying back shares.

Oh wow, so another lefty/soft money talking point is actually a crock?

Whooda thunk?

How much of Apple's cash is sitting offshore deferring taxes and waiting for another offshore tax holiday like the one that occurred around 2005?

That's a very good question. Given the current uncertainties regarding the future of the corporate income tax, why would Apple repatriate funds from abroad to pay a cash dividend to shareholders? But, the issue is not simply whether Apple is "waiting around for another offshore tax holiday like the one that occurred around 2005". Every serious presidential candidate (including the incumbent) has proposed a significant decrease in the marginal corporate tax rate. If Apple repatriates now, they will pay 35 percent US corporate income tax on that money (less foreign income taxes paid, which are much lower). Obama has proposed a decrease to 28 percent (this does not affect the foreign tax credit). On the other hand, if Obama gets his way, the rate of tax on dividends paid to domestic US shareholders will increase from 15 percent to 20 percent. Apple, like many other companies with cash offshore, is likely prudently waiting to see how this will shake out.

Another interesting point about Apple is that, unlike almost every other US multinational, they have not taken full advantage of a financial accounting rule that allows US companies to not book a deferred tax charge on the expected residual US tax when those earnings are repatriated. The charge is not required to be made if the company asserts it intends to keep the funds offshore permanently.

Apple may be doing this for one of two reasons;

1. Their earnings are so huge now that they can afford to take a current charge. If their earnings fall short in future, they can reverse that decision and magically increase earnings. This may be used to smooth out their financial statement earnings;

2. They really do intend to repatriate, but the only issue is timing.

Clearly the government needs to step in here and redistribute the hoarded cash to struggling solar companies. After all, the true engine of economic growth will always be companies like Solyndra.

This is the strangest case of liquidity hoarding I've ever seen. I think they are even issuing debt.

I would charge them 25 bps just to manage that cash.

They are not issuing debt. Apple is 100% internally cash financed.

Mea culpa. You are right. I checked on it after I posted because i wasn't sure.

A cash hoard that large is a sign that management doesn't know what to do or is worried about the future. Management often runs companies in favor of itself, not shareholder interests. Steve Jobs is dead. There's going to be some turbulence in Apple's future, either the shareholders will revolt or the company run into trouble.

This is interesting, but I'm not sure why I should care about it.

Apple was months away from going bankrupt when Steve Jobs came back. Steve Jobs vowed never to have Apple in the same position again. Cash hoarding at Apple is just part of Steve Jobs' legacy. Of course it's a different question whether Apple should cash hoard.

Reminds me of how grandparents who've seen the Great Depression never throw away anything!

Apple has so much cash they can (and just did) do both: pay a dividend and still keep a huge cash hoard.

So long as the money supply is expected to keep increasing, their stockholders will not demand that they repatriate the cash.

I have nothing against Apple (I loved the iPhone before Android came out) but can we stop talking about them? Apple, Apple, Apple...Apple! It's getting annoying, our good intentions and inventions at Google like the Knowledge Graph and 10 cent apps are getting ignored.

This is more interesting than people imagine. A few high-tech firms, staffed by some brilliant decision-makers, are piling up cash. This is no accident, nor is it hoarding. I have several theories:

1. They plan on running some sort of hedge fund in-house since they can easily tap a huge amount of very talented mathematicians (Google was hiring fixed income quants last year)

2. Apple's board understands creative destruction and knows they won't be able to prevent institutional stagnation from blinding them from new technological threats. So they plan on building something like a high-tech bank, which lends and invests in (via buy-outs or just VC funding) smaller, more nimble innovators

3. They agree with McKinsey's assessment that capital is set to become very expensive in the coming decade (due to competition from budding emerging market private sectors), so they are hoarding it in anticipation of scarcity

I think ultimately this is about moving aggressively into capital distribution and intermediation. A lot of firms have (half-heartedly) followed that route. General Electric and Caterpillar are two of the tech firms I can think of that moved into finance as they got bigger.

General Electric in particular basically became a hedge fund over the past 20 years.

Apple needs to stay hungry--actually it hasn't been hungry for some time. 90 billion may allow many to stay foolish, but maybe a bit too foolish. So, this dividend thing is not large enough to create hunger...There is no longer the leadership (S. Jobs) to encourage smart foolishness--and notably, even when fat, you yearn (hunger) for the approval of your taskmaster (again S. Jobs).

Bottom line, Apple may be in a world of hurt in 10 years.

& the point being that S. Jobs is gone, Apple might be foolish in the wrong way without steve, and they are definitely not hungry.

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