In about a month, there will be a few high school seniors who will each be stressed by the following "worry:" Harvard, Stanford, and Yale have admitted me. How do I choose among these schools? Similarly, an aspiring engineer may be forced to choose between MIT and CalTech. These are really tough choices for these poor babies! Let's face it: very little distinguishes each of these schools from an academic or pedigree perspective. In both of these cases, the solution is simple: visit each of the schools and then decide by a coin flip!
Ok, I probably shouldn't trivialize the poor kids' worries; indeed, they may well have some sleepless nights as they wrestle with their college acceptance decision. They are faced with a classic high class problem: a problem that is good to have, yet only a privileged few will face.
Apple's High Class Problem: Too Much Cash
Likewise, Apple (AAPL) has a high class problem - the iPad maker is awash with $100 Billion in cash on its balance sheet and many billions more on the way from the anticipated iPad 3 launch next week. There is no company on the planet that can find a way to reinvest that amount of cash organically, and Apple is no different.
Apple has more than ample cash to grow organically, as it currently invests $2.4 Billion annually in R&D to fund its innovative designs. This very healthy and productive R&D investment represents a mere 2.5% of its current cash balance. Acquisitions are another potential use of its cash hoard. Sure, Apple can buy other companies, but why empire-build with less profitable companies?
Avoid Market Confusion
At the same time, Apple does not want to confuse the market by issuing a regular dividend. The market generally views the initiation of a regular dividend as a signal to the market that a firm's growth is slowing.
Apple's problem is quite the opposite of growth deceleration. In fact, at the heart of Apple's "problem" is that it has a negative cash conversion cycle - business-speak that can be loosely translated as a "pre-orders model." In effect, Apple essentially receives payment before the products are built. Dell (DELL) had this same problem in the 90s. Put simply, Apple is a cash-generating machine. As it continues to grow, Apple will generate even more excess cash that is not required to maintain and to grow its market dominance. If only all US companies could have this "problem," our economy would soar!
Increasingly, analysts are pressing the company to return the capital to shareholders. There are very few companies that can even dream to have this problem: Google (GOOG), Microsoft (MSFT), Amazon (AMZN), Facebook (FB) have similar issues with their cash hoards. These rare business gems generate more cash than their managements can rationally reinvest in their business.
Solution: Declare a Special Dividend
Analysts and shareholders are increasingly pressing Apple to distribute some of the unneeded cash. What should Apple do?
Apple should resolve its high class cash "problem" by paying a one-time special dividend. Apple can distribute as much as $50 billion to its shareholders without impacting its moat. For strategic reasons, Apple clearly should not have less dry powder than its rivals Microsoft and Google; a $50 billion special dividend would put its cash balance in-line with its peers.
The special dividend's advantage over a buyback or a "regular" dividend is that a one-time dividend creates neither a precedent nor an expectation for additional dividends. With this distribution, Apple can clean the excess cash from its balance sheet without confusing the market about its growth prospects. The one-time distribution should be framed as some spring cleaning of its balance sheet. Then, Apple's management can continue to focus on operations and innovation without the unwanted grunting from shareholders seeking a return of unused capital.
Now, messaging is important. Apple needs to clarify that they have a high-class problem and are rewarding shareholders with this one-time special dividend. Apple will be seen as a responsible steward of shareholder capital that has considerable room to grow.
High-class problem solved.