The results are in from Apple’s (AAPL) recently announced fiscal fourth quarter 2011 and the company seems to print cash faster than the Fed. When CEO Tim Cook says to Siri, “Do you print money?” the answer is a resounding yes.
Despite the iPhone 4S breaking sales records with four million units sold this past week, that performance is not even in the recently released earnings. In fact, I am of the opinion that earnings were depressed as consumers waited for the new iPhone to launch. For this article I want to focus on Apple’s monumental "cash," which I define as cash, marketable securities, short- and long-term investments. In other words, this is what many analysts refer to simply as “cash." Apple now has $81.6 billion in cash sitting on its balance sheet and hardly a week goes by without an analyst or activist telling Apple’s management to XYZ with its funds. I will highlight and elaborate on five of the more popular suggestions and ultimately wrap up with my suggestions for the $390B gorilla.
Repurchase Shares Apple Shares Outstanding
This is one of the more potent ways to return money to shareholders because it has a direct positive impact on EPS. At the most basic level, if there are fewer shares outstanding then the company’s stock will appreciate to keep the market-cap the same (Share Price = Market Capitalization/Shares). As a bonus, a share repurchase plan is not an obligation so it is fully reversible if the company does not want to follow through with the entire purchase.
History is littered with cases of companies buying their shares only to see the stock price tumble (such as Netflix (NFLX) recently) but I do not have that concern with Apple. I have been urging Apple to repurchase shares for years and I can only imagine what Apple’s share price would be today if they had repurchased shares during the financial crisis below $100.
Initiate A Dividend
The second way of returning money to shareholders is one that we all know well: dividend. This seems to be the preferred approach that is favored by those with an opinion on the matter. The theory being that investors can generate higher returns on the cash by investing it themselves than Apple can. I would not complain if Apple were to issue a small dividend but I do not believe that Apple’s dividend would be large enough to attract a new class of income investors to the stock. Furthermore, initiating a dividend is often seen as a sign that the super-growth days are in the past, which is not the type of signal that I would like to send to shareholders.
Acquire Competitors Or Large Peer
Large technology companies acquire other large companies right? Microsoft (MSFT) acquired Skype and Google (GOOG) acquired Motorola Mobility (MMI) so this must be the way to go, right? In my opinion this would be the absolute worst use of Apple’s cash as it would involve clashing cultures and other complications that Apple does not need. To be frank, why mess with Apple’s success when everything is going so well? Sure Apple could acquire Research In Motion (RIMM) or Hewlett-Packard (HPQ) but I see no compelling reason to do so.
Embark On Strategic Acquisitions
On the opposite end of the M&A spectrum are small, tactical purchases that can enhance a strength or bolster a perceived weakness. This can take the form of acquiring a company or even patent portfolio. Siri was acquired for an undisclosed amount and is the biggest feature in the new iPhone 4S and the team behind it is one of the largest at Apple. In this respect, the rate of return is immeasurable as the iPhone 4S is already a smash hit with four million units sold in the first weekend. Apple has had remarkable success in this area because they do not rush into acquisitions but instead look for potential breakthroughs. While it is not exactly an Apple acquisition, Jobs’ purchasing of Pixar for millions and flipping it for billions shows the potential of acquiring small start-ups.
Engage Supplies In Long-term Contracts
Apple has been doing this for years and is one of its most significant competitive advantages. Anyone who shops at Costco (COST) knows that buying in bulk can save money but Apple takes this approach to the electronic components that it uses in its products. Buying billions of dollars worth of chips, fabrication machines, glass and various other components Apple achieves key objectives:
- Lowers the cost of its own products and ensures the necessary supply for growing product lines
- Reduces the available supply of scarce resources which increases prices for competitors and sometimes impairs the ability to even produce a product
In conclusion, do not dwell on Apple’s cash surplus cash because it provides value even when idle. No, I am not referring to the $200M-plus in interest it generates (although that is a risk-free flow to earnings). By simply having more cash than any other competitor Apple is able to intimidate its peers and extract better terms on deals. This assertion is difficult to test or measure but based upon the capital gains I have been reaping with Apple, I do not want to see the company make any rash financial management decisions now that Steve has left the company. If I had to support any of the above mentioned options I would prefer share repurchases and strategic acquisitions. Repurchases help investors today and small acquisitions have the potential to be the next big thing when selected carefully.
Disclosure: I am long AAPL, GOOG, MMI.