One Reason Apple May Be Hoarding $18 Billion

In the March 17th issue of Fortune I came across an interesting article about Apple (AAPL) and CEO Steve Jobs. Some investors in Apple have been disappointed that the company refuses to return any of its $18 billion war chest to shareholders in the form of stock buybacks or dividend payouts. Why haven't they, you might wonder? Well, when asked how he plans on managing through the economic downturn, here is what Jobs told Fortune:

We've had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren't going to lay people off, that we'd taken a tremendous amount of effort to get them into Apple in the first place - the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D so that we would be ahead of our competitors when the downturn was over. And that's exactly what we did. And it worked. And that's exactly what we'll do this time.

Interpretation: Don't expect massive buybacks or dividends. Sure, it would be tough for Apple to invest the entire $18 billion even under this mindset, but after the company had cash issues back in the 1990s when they were struggling, Jobs clearly wants to overly cushion the company for whatever the future brings.

It makes sense long term, but clearly in the short term investors will be disappointed with the decision to sacrifice short term stock price gains for long term flexibility and stability.

Full Disclosure: Long shares of Apple at the time of writing.

Comments

[raman kandola]

AAPL. had to borrow money from MSFT to survive on those days. He (Steve Jobs) has a long term vision, and is ahead four to five steps upfront, not back ward, or some one just riding the wave. With Steve Jobs, the company is poised to reach new highs, and milestones.

[Barbarian]

Since I'am a long investor since the early 90's, I totally back Steve Jobs positions on this.... as a shareholder i'd rather Apple keep their 18bil for R&D and some acquisitions if necessary.

[Barbarian]

raman .. Apple never borrowed any money from microsoft, you must be a PC switch... :-)
MS invested $150 mil which at the time was not much, there where a few individual investors that invested more, Apple always had a nice stash of $$$ even in the darker times , no debt and a decent customer base.

[VennData]

The word at the the time was that MSFT investment was made because they didn't want to lose it's only competitor - Intel-AMD-like - and face Justice dept troubles (if they only knew Bush would be elected and load up the administration with ideologues like Charles James who rescinded any fines things might have been different.)

[atlasapple]

How dare Steve Job's think about the future and actually prepare for it. Doesn't he know that as a CEO he should only be concerned with share price and not the long term viability of the corporation he runs.

It's attitudes like his that will ruin countless other American companies who sacrifice there companies long term futures at the alter of Wall Street's short term demands.

[mrtaxx]

Apple should not do a buy back or give a dividend. Msft gave out a $3 dividend and bought back billions in stock and it went nowhere, and at the time they had over $100 billion in cash. Now they could use that money to buy Yahoo. Ebay also bought back billions in stock and the stock went nowhere. Based on the Msft and Ebay examples a stock buy back doesn't work.

[User 170478]

I agree. No debt. If you want short term returns, invest in utilities.

[dithers]

How many more times must we read that Microsoft 'bailed' Apple out?With a lousy $150 mil? Apple had $4.5 billion in cash reserves back then.
The payment was partly in settlement for the court case where M$oft stole Apple's ideas.....

[Neal VG]

What he is saying is that he is expecting to need that 18 Bil. Maybe RIMM earnings on wednesday will help everyone understand that when you are losing your house/car etc... you don't rush out and buy a $500 cell phone. Even if it is the coolest phone ever!

[samij]

another interpretation is that jobs expects the company to need that $18b to avoid cut backs in operations. in other words, he expects that the cash flow from operations will not be enough to cover the expenses. to rephrase that, he expects the company to make loss, not profit, at some point not very far in the future.

[Jonathan Christopher]

This market is treating many companies unfairly, with small companies hurting the most. In the end, this situation will provide a cash-rich company the opportunity to buy excellent assets at pennies on the dollar. Steve Jobs is right, both short term and long term to keep his powder dry.

[detourdog]

The $150 million was a settlement of paten complaints by Apple and part of a cross licensing agreement

[dbohler]

....and who knows....they might need the money to buy one ...or two...or three of the music labels as wel....

[TanToday]

As a long term investor in AAPL, may I suggest another use for that hoard?

ADVERTISING?

Sure you have apple advertising here and there, but what really holds the world back from the cool products is inertia and lethargy, now if you hype it more than now, REALLY pound the right media with clever, creative, informative ads, and prime that pump harder than ever before....

... some of the drones holding onto the WinDoze platform, just may be shamed into "keeping up with the Jones's" and retiring the old, staid, problem prone, and just plain boring boxes for sleek aluminum information Ferrarri's.

And it has a faster payback than other R&D, and marketshare would continue to grow, but on a different and more accelerated growth curve.

Just imagine the good media buys that can be made now, that the banks, and auto firms are basically in survival mode and wondering how many prearranged advertising commitments they can shed...FAST.

[Brandon]

"another interpretation is that jobs expects the company to need that $18b to avoid cut backs in operations. in other words, he expects that the cash flow from operations will not be enough to cover the expenses. to rephrase that, he expects the company to make loss, not profit, at some point not very far in the future." - Samij

Sammich, why are you always negative on Apple? You were negative on Apple when the stock was under $100 and negative all the way up to $200. Strangely, when the stock was on it's way down I don't remember seeing your illogical comments.

Seriously. try to be just a little objective.

[jocca]

The reason Apple will do very well is because it is a company with vision and a long term strategy to innovate in the field of technology, unlike most companies. The stock price will follow as Apple reaps the reward of its business model. If you want to invest in a company which is more interested in goosing up its share price, then invest in Enron, the epitome of such kind of company.

[appleshuttlemeister]

Apple is growing fast and the need for a larger and larger cash herd to maintain the company in case of any downturn is growing also. Now is not the time to spend money on dividends and buybacks with the economy a big unknown.

I just wish the analysts and other investors would include the $20 per share in cash into consideration before they say Apple is overvalued.
When you back out the $20 per share (and growing rapidly) in cash, Apple is selling at an even lower relative cost than it has historically
at a time when its earnings are growing at the fastest pace it has in its history. Also, you'd think the safety of having a huge cash hoard would
allow it to sell at a premium simply because it would be a safer company to invest in, that is less likely to be restricted from what it wants to do because of economic conditions and much less likely to go out of business that other companies that have less cash or debt.

[think different]

Steve Jobs needs to be cloned so we can get rid of the rest of those Wall Street parasites! What a movie - what a profit!