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Apple Is Cheating You

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You know those great tech earnings reports from last week? Forget them. Intel (Nasdaq: INTC  ) has nothing on Apple (Nasdaq: AAPL  ) .

Let's get right to the numbers. For the fiscal fourth quarter, ended Sept. 26, revenue improved 25% and diluted per-share earnings soared to $1.82, up 44% year over year. Both results easily beat Street estimates, which called for $9.2 billion in revenue and $1.42 in per-share earnings.

Most media outlets are reporting how the iPhone tailwind -- 7.4 million handsets sold, $2.3 billion in recognized revenue -- helped Apple soar. I'm more interested in the MacBook numbers. Portable unit shipments were up 35% over last year, while revenue improved 27%, to $2.87 billion.

Compare those numbers with the latest market data from DisplaySearch. Total portable PC revenue fell 5% in the second quarter, 14% if you exclude the sort of margin-killing netbooks that Dell (Nasdaq: DELL  ) founder and CEO Michael Dell spoke out against recently.

Apple, in short, is defying not just the "Great Recession," but also a broader industry trend toward lower revenue and margins. (Gross margin improved to 36.6% in fiscal Q4.)

How Apple is cheating you
And yet, as great as these numbers are, I'm troubled by Apple's capital allocation. Here's why:


Fiscal 2009*

Fiscal 2008*

Fiscal 2007*

Fiscal 2006*

R&D Spending





Capital Expenditures





Free Cash Flow





Total Cash and Investments





Diluted Shares Outstanding





Dividends Paid





Sources: Apple and Capital IQ.
*Numbers in millions.

Apple has been mostly stockpiling cash since fiscal 2006, earning very little for what it has. How little, you ask? Turn to page 35 of Apple's last 10-Q quarterly report:

The weighted-average interest rate earned by [Apple] on its cash, cash equivalents and marketable securities decreased to 1.11% in the third quarter of 2009 from 2.66% in the third quarter of 2008.

Billions in the bank, earning nothing more than passbook savings rates. You call that excellent capital allocation?

Don't get me wrong; I support Apple's right to retain and reinvest operating capital back into the business. This is a growth company with a runway in front of it, thanks to the iPhone and its fast-growing App Store. What I don't understand is why so much cash hasn't been reinvested into the business -- $23 billion over three fiscal years.

What are you waiting for, Apple? An acquisition? Adobe (Nasdaq: ADBE  ) could be a smart buy. Netflix (Nasdaq: NFLX  ) is still affordable.

History says that CEO Steve Jobs isn't pining for a big buy. PA Semi was one of his bigger bets, and that deal was worth only $278 million. As for other alternatives ... I have no idea; $34 billion is more than enough for Apple to endure anything other than a cataclysmic downturn.  

Semismart investing
When Apple does invest, it does so judiciously. For example, its new data center facility in Silicon Valley was originally outfitted by MCI Worldcom, and then mothballed. Apple got it secondhand for roughly $50 million, the San Jose Business Journal reports.

The Mac maker is also being careful with expanding its retail presence. Apple opened 15 stores during the quarter; it now has 273 worldwide, up from 247 at the end of last year's Q4. That's an 11% boost, less than half Apple's revenue growth rate.

In short: All signs point to Apple being unable to deploy all of the cash it produces, and what it doesn't deploy often lingers in the equivalent of a passbook savings account.

You can do better than this, Steve. You should follow Warren Buffett's dictum and Microsoft's (Nasdaq: MSFT  ) lead, and return some of your underused capital to shareholders in the form of a one-time dividend.

There's no downside to this plan. Say you were to pay out $4 billion. That's a 2% one-time yield at current prices, and it would leave Apple with $30 billion in the bank. And you'd be under no obligation to pay dividends on an ongoing basis, as IBM and Oracle (Nasdaq: ORCL  ) are.

Investors are right to bid up shares of Apple this morning. There's so much this business is doing right, and doing better than competitors. A long-overdue dividend payment would add a fairy-tale ending to this almost-perfect stock story.

That's my take. What do you think? Use the comments box below to sound off on Apple's earnings and bulging bank account.

Apple, Adobe, and Netflix are Motley Fool Stock Advisor selections. Dell, Intel, and Microsoft are Motley Fool Inside Value picks. The Motley Fool owns shares of Oracle. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers had stock and options positions in Apple and stock positions in IBM and Oracle at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy appreciates the fine aroma of a triple-shot espresso.

Read/Post Comments (11) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 20, 2009, at 3:15 PM, ozzfan1317 wrote:

    This is why I refuse to buy shares their growth is eventually going to slow and without a dividend I see no reason to put my cash in. Its not like their market cap can grow much from here.

  • Report this Comment On October 20, 2009, at 3:38 PM, demodave wrote:

    I think I would prefer that this be a long-term capital gains distribution, rather than a dividend. That tax implications are much sweeter that way. And if I am doing the math right, the $4b suggested is roughly $4/share. (Multiply my holding value times suggested $4b payout and then divide by current market capitalization. Would, of course, be easier to find the right page with # shares outstanding on

    Merry Christmas! :)

  • Report this Comment On October 20, 2009, at 4:58 PM, largesse wrote:

    Apple is holding onto capital because when the technological conditions are right, they want to make the big swing into large-scale video distribution. They are biding their time, waiting for the studios to reach the needed agreements.

  • Report this Comment On October 20, 2009, at 7:03 PM, 50something wrote:

    Apple should look at Danish niche AV company Bang & Olufsen........... and think about a takeover. These businesses would dovetail together so well, and Apple could take B&O to a new level.

  • Report this Comment On October 20, 2009, at 9:17 PM, kirasaw wrote:

    Maybe Apple should buy Dell and just put it out of its misery by shutting it down. Apple has 34 billion in cash Dell's market cap is less than 30 billion (1/6 of Apple's market cap)

  • Report this Comment On October 21, 2009, at 5:41 AM, kristm wrote:

    They're just waiting for the right company/companies to come along.. And it never hurts to save for a rainy day; you never know when Microsoft might come calling with a busload of bad news.

  • Report this Comment On October 21, 2009, at 2:38 PM, thisislabor wrote:

    I think your looking for a fairy tale.

    they have been doing everything right so far.

    as long they dont let it sit there for too long, inflation has averaged 3% for last 80 years running I'm fine with it.

    they may also be planning something to do with that capital.... just as long as they don't ever get that "oh we have lots of money" mentality I am fine with them holding onto it and investing it for shareholders. Sometimes the best action is no action.

  • Report this Comment On October 21, 2009, at 4:28 PM, Dima wrote:

    While a one-time dividend or a reoccurring one would be an o.k. way to deal with this money, unless you hold your shares in a tax protected/deferred account, this would just trigger some cash payment to pay Uncle Obama. And after 2011 Bush tax cuts expire, the dividend tax rate could (and probably WILL) jump back above the short term capital gains rate as it was before 2002. What AAPL should do is buy back their shares! That's a way more tax friendly option to investors.

  • Report this Comment On October 21, 2009, at 8:07 PM, grawlix wrote:

    What? Issue a one-time dividend so some day trader can own the stock for 15 minutes and take out the cash?

    And it's just laughable that you would advise Apple - "Steve. You should follow...Microsoft's lead", given their relative performance.

    Disclosure: I've held a chunk of AAPL for a couple of years now and I'll happily ride them well into the future. I like the flexibility that $34b provides more than I'd like $4 per share pre-tax.


  • Report this Comment On October 21, 2009, at 8:55 PM, beetlebug62 wrote:

    I love people who say Apple can't get bigger, cause it's big! Where's the analysis?

  • Report this Comment On October 21, 2009, at 9:06 PM, mikecart1 wrote:

    AAPL's lack of dividend is why I will never buy a share. They are still better than MSFT though. But I hate companies that keep cash for themselves. Spread the wealth!

    This is why MO is my bestest friend in the whole world. :o)

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