Debunking the Myths of Apple's Liquid Assets

| About: Apple Inc. (AAPL)

Apple (NASDAQ:AAPL) has become a frequent target of critics who make arguments that Apple is simply hoarding an unfathomable amount of cash. Detractors argue that Apple should return money to shareholders, invest in creating domestic jobs, or pursue M&A activity. As one of the most innovative and profitable companies in the world, Apple has amassed a substantial amount of current assets. The volume of rumors and misinformation surrounding Apple’s most simple asset is astounding and needs to be addressed. Below I will present and disprove four common myths about Apple’s liquid assets:

1. Apple has $60 billion in cash. Many analysts simplify Apple’s current assets and state that the company has $60B in assets; however, this is not exactly true. Even the New York Times is guilty of the oversimplification.

Apple Balance Sheet
(Click to enlarge)

In Apple’s most recent 10Q balance sheet presented above, the company has $10.7B, $16.2B, and $32.7B in cash and cash equivalents, short-term marketable securities and long-term securities, respectively. This grand total of $59.7B is conveniently lumped together and called "cash" by many. The long-term securities have maturities greater than one year, thus are illiquid so are not readily available for use by Apple.

Apple Cash, Cash Equivalents, ST/LT Securities
(Click to enlarge)

Furthermore, the chart above breaks down Apple’s cash, cash equivalents, ST, and LT marketable securities. Per accounting guidelines, Apple defines the categories as follows:

  • Cash Equivalents: Highly liquid investments with original maturities less than three months.
  • ST Marketable Securities: Original maturity less than one year.
  • LT Marketable Securities: Original maturity greater than one year.

As you can see, only $3B of the $27B is actually invested in cold hard cash. In contrast, the remaining securities are less liquid and Apple would not receive full face value if forced to sell.

2. Apple is generating no return on its cash. Apple discloses that it earns approximately 0.75% on its cash, cash equivalents, and marketable securities. This is consistent with its policy of investing in "A" rated securities or better "with the objective of minimizing the potential risk of principal loss." Yes, this a modest rate but it contributes another $200M to earnings, or $.22 per share. I can think of a lot of companies that would be pleased to earn $200M. It is interesting to note that a portion of Apple’s investments are managed in an internal portfolio while the remainder is managed externally.

3. Apple has never paid a dividend and never will. This is another common misconception with Apple. Apple paid a cash dividend from 1987 to 1995. As I have mentioned in the past, "it appears to be unlikely that management will resume the practice in the near future." Additionally, Apple last split six years ago in February 2005. A dividend and/or a stock split are always possibilities.

4. Apple is free to issue a dividend without consequences. While Apple can technically declare a dividend of any size whenever it wishes to, there are repatriation restrictions that exist. As of the last quarter, $35.1B of the $59.7B cash, cash equivalents, and marketable securities were held by foreign subsidiaries. To summarize the implications, Apple is able to legally avoid paying a portion of US taxes on overseas earnings as long as the earnings remain in the foreign country for reinvestment. I am not an expert in taxes but if Apple were to bring the $35B to the United States for a dividend there could be a significant tax bill. Using Apple’s most recent effective tax rate of 25%, Apple could owe almost $9B in taxes (this is an oversimplification because I am ignoring any credit for taxes paid). The magnitude of the tax implications should give anyone calling for an Apple dividend a moment of pause.

Now that you have a better understanding of Apple’s assets, what does this mean for investors? The biggest takeaway is that Apple has far fewer assets at its disposal than you may have previously thought. This means that a large acquisition or dividend is unlikely. Those interested in generating additional cash from their Apple investment should review the latest in my series of Apple option strategies.

Disclosure: Author holds a long position in AAPL and is short AAPL Mar. 18 360 Covered Calls.