As of its most recent quarterly filing, Apple (AAPL) had more than $65 billion in cash and securities on its balance sheet. Plenty of investors have argued that this huge safety blanket makes the company's valuation quite reasonable. We agree. However, this liquidity hoard isn't being put to good use. Apple needs to do better.
First, Apple is earning practically nothing on its cash and securities, and management likely doesn't have the competence or inclination to reach for additional yield (we hope and trust that it won't). Furthermore, the practically all of this cash serves absolutely no purpose in the company's day to day business. Relative to its size, Apple's business is relatively cheap to run. The business isn't capital intensive, and the return AAPL earns on its R&D spending is astounding. Plainly, there is no internal use for this liquidity.
So Apple has three options:
- Continue its current policy of low-yield capital preservation.
- Make acquisitions.
- Pay dividends or buy back shares.
The current policy (option #1) isn't useful for shareholders. The yield AAPL is earning is paltry, and it will continue to be so. There aren't any big acquisitions on the horizon that make sense for shareholders, and we think most tech company valuations make option #2 unattractive. Also, AAPL's remarkable success is due in no small part to its corporate culture, and this culture wouldn't likely survive a large acquisition unharmed. This is likely why management hasn't pursued this course thus far.
So why hasn't Apple gone for option #3 to date? We're at a loss here. There really isn't a rational argument for continuing with option #1, and this course of action is becoming more untenable as the cash hoard grows at a rate of more than $6 billion each quarter. The company could easily pay a $50 billion special dividend without adversely affecting its business in any way. Further, that amount would likely be replenished in less than two years. No company has ever paid out such a staggering sum, but AAPL has broken all sorts of barriers. Why not break this one too?
We'd like Apple's management to answer the following question: When is enough enough? If $65 billion of excess liquidity isn't sufficient to pay a dividend, what amount is? $80 billion? The company will be close to this threshold by the end of this fiscal year. $100 billion? Apple could easily surpass this milestone next year. You get the point. There is no way for Apple to deploy this capital effectively. It's time to return it to shareholders.
In addition to/in lieu of a special dividend, AAPL could use its cash to buy back its own stock, and it could do so in a big way. We think AAPL shares are reasonably priced, and if the company keeps executing the way it has been, its current share price will prove really cheap. We don't think it's unreasonable to say that AAPL is worth $400-450, and management could boost this value considerably by taking out 20-25% of the float. Again, it could do this without adversely affecting its business, and the cash should keep rolling in at an astounding rate.
We're not saying any of this because we want management to artificially boost the stock price. We're long term investors, and we'd rather have management pursue actions that enhance the value of the company for its owners rather than short term measures to influence the stock price. However, in this case, the best long term course of action would likely accomplish both.
So far, investors haven't made much of this issue, probably because Apple's business has performed so well. We think Apple is executing and innovating better than any other company on Earth, but just because it's the best doesn't mean it can't be better. AAPL management needs to do a better job using its capital to increase the value of its business, and we believe that there will be a big special dividend and/or big share buybacks in the not too distant future.