A Different Take On Apple's Cash Stash

| About: Apple Inc. (AAPL)

When Apple (NASDAQ:AAPL) reported its monster Q1 results on Tuesday, the company revealed that its cash, short-term investments, and long-term investments totaled $97.5 billion. This disclosure triggered another round of speculation about what the company should do with all that excess cash (Apple carries no debt). Management was forced to deal with various iterations of the question: "When and how might you return cash to shareholders?" on the earnings conference call. For the most part, analysts have predicted a relatively modest dividend of 2-3%, to be initiated sometime this year.

There are certainly reasons to believe that a move like that would be good for the stock. Most importantly, a large class of value and income investment funds will only hold dividend-paying stocks. By offering a dividend, Apple could therefore increase the potential market for its shares, driving the price up.

On the flip side, some people argue that if Apple offered a dividend, the share price might decline because it would be seen as a signal that Apple was no longer a "growth" company. This logic seems somewhat suspect. Dividends and share buybacks are seen as marking the end of growth because they signal that the company lacks profitable opportunities to invest in its business. However, keeping $100 billion in cash on your balance sheet would appear to send the same signal. Clearly, Apple does have significant growth opportunities, but these are dwarfed by the company's current cash-generation ability.

All that said, Apple is a company known for surprising the world. While a modest dividend or share buyback are possible, Apple executives may have other ideas. The following are three fairly radical ideas for what Apple could do with excess cash.

Initiate a Massive Quarterly Dividend. Rather than starting at a modest payout ratio, Apple could capitalize on its strong growth to begin with a roughly 100% payout ratio. A quarterly dividend of $8-$10 per share would lead to $30 billion or more in annual dividend payments, but the company's existing cash stockpile would provide a more-than-adequate cushion. Meanwhile, since Apple is predicted to see nearly 20% annual profit growth over the next five years, the payout ratio would quickly become more manageable. A dividend of this size would reward Apple shareholders for sticking around.

Become a Green Apple. Apple claims that its operations and products produced 14.8 million metric tons of CO2 in 2010. That amount has probably grown significantly along with the company. Still, for a pittance (perhaps $150-$200 million/year), Apple could become completely carbon neutral. Given the company's scale, publicizing a decision like this could potentially increase sales enough to offset the cost, since people like feeling good about what they buy. Furthermore, the cost is miniscule compared with Apple's profits today. On the other hand, that means it wouldn't do much to reduce Apple's cash balance.

Start a Private Equity Fund. Right now, Apple is earning less than 1% interest on its investments. If the company spun off its cash into a private equity fund, it would become the best capitalized private equity firm in the world. Since the company clearly cannot find profitable ways to use most of its cash internally, a move like this would unlock value for shareholders. Since the company's cash would be put to more productive use, it would be worth more than it is today.

I'm not willing to say that any of these outcomes are particularly likely. But given Apple's history, it would not be surprising at all if the company has bigger plans for its cash than analysts currently expect.

Disclosure: I am long AAPL.