Don't Do It, Apple!

As of March, Apple (Nasdaq: AAPL  ) was sitting on a whopping $66 billion of cash and investments. It generated $23 billion in cash flow over just the previous 12 months. With no dividend or share buyback program in place, the cash is piling up rapidly. It's no wonder The Wall Street Journal took Apple to task over the low returns it is getting on its cash stash.

The Journal said Apple could learn a thing or two from Microsoft (Nasdaq: MSFT  ) about generating returns from cash. The big software maker doesn't just invest in cash. Microsoft also invests in bonds, stocks, and derivatives exposed to grain, precious metals, and energy. That sounds more like a hedge fund than a tech company. Microsoft's aggressive management of its cash hoard could be attributed to its longtime treasury leader, George Zinn, who has a background that includes working at a money management firm that specialized in foreign exchange and commodity trading.

The Journal article went on to note that Google (Nasdaq: GOOG  ) was following in Microsoft's footsteps...albeit "not quite as adventurously." Google hired a former Microsoft treasury executive who "diversified its portfolio."

In 2010, more risk meant more reward. Adventuresome Microsoft did get a noticeably higher return on its cash investments last year than less adventuresome Google (see table). And Google's investments outperformed Apple's.  

Company

2010 Return Rate

Apple 1.0%
Google 2.8%
Microsoft 3.7%

Source: Wall Street Journal.

But sometimes more risk means ... well, more risk. In 2009, stodgy Apple outperformed Google, which outperformed adventuresome Microsoft (see table).

Company

2009 Return Rate

Apple 1.8%
Google 1.6%
Microsoft 0.4%

Source: Wall Street Journal.

The compounded return rate over the two-year period narrows the gap in returns among the three companies, as shown in the following table. Indeed, Google's moderately adventuresome approach outperformed Microsoft's more adventuresome approach.

Company

2009-2010 Compounded Return Rate

Apple 2.8%
Google 4.4%
Microsoft 4.1%

How bad can an adventuresome treasurer be? Too much cowboy spirit in the treasurer's office at Dell (Nasdaq: DELL  ) became a material drag on earnings in the early 1990s. And it hasn't been that long since derivatives contributed to a global financial meltdown, and money market funds that stretched for a little extra yield "broke the buck," froze redemptions, and liquidated.

Foolish takeaway
I'm all for Apple putting its megahoard of cash and investments to better use. But reaching for yield in an environment that doesn't offer it -- particularly as risk aversion seems to be rising -- isn't a better use.

What will Apple do with its cash? An easy way to stay on top of market developments is the Motley Fool's free new My Watchlist feature. You can get up-to-date news and analysis by adding these stocks to your Watchlist now:

Fool contributor Cindy Johnson owns shares of Microsoft. The Motley Fool owns shares of Google, Apple, and Microsoft. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, and Google, as well as creating a bull call spread position in Apple and a diagonal call position in Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (6)

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 May 25, 2011, at 8:17 PM, SimchaStein wrote:

    Great article.

    Just take Steve at his word. "we want to have dry powder". They don't need to chase yield.

    Far more important, "Keep it Simple". Apple is all about user experience. Jobs does not want his top execs and board members discussing rate of return, where are t-bills headed, which country will default next.

    Microsoft and Google now are so complex that no one can manage - yet they bother with managing yield??

  • Report this Comment On May 25, 2011, at 9:09 PM, xmmj wrote:

    I think the cash situation has grown large enough. I think they should invest in...

    their investors.

    Give a dividend or at least some buyback of shares. Now is a great time to do so since the evaluation is fantastic.

  • Report this Comment On May 25, 2011, at 9:11 PM, xmmj wrote:

    Apple will double in 2-3 years. A share buyback will therefore be a brilliant investment.

  • Report this Comment On May 25, 2011, at 10:54 PM, ConstableOdo wrote:

    Apple doesn't care anything about investors. Why should they. That's not their job. Their job is to build consumer-friendly devices and they are succeeding at that. The revenue and profits are flowing. If investors aren't happy with Apple, they should leave and look elsewhere for quick profits. If Wall Street doesn't value Apple or reward Apple shareholders, that's just tough luck. Apparently, Wall Street doesn't reward solid companies and are only interested in companies that turn money over quickly. That's bad for the economy, but that's just how things are in America. When a company such as Netflix holds more value for investors than Apple, there is definitely a problem about valuation reasoning.

    Apple shouldn't have to give dividends or buybacks except to attract investors. Apple probably will never do either. The company is flush and actually Apple seems to be making enough revenue to increase the share price naturally if the P/E didn't keep getting squeezed by Wall Street. That's a deliberate move being done by Wall Street, not Apple.

  • Report this Comment On May 25, 2011, at 11:15 PM, TechnoHistorian wrote:

    On Dividends: Can Apple investors have their cake and eat it? Lots of funds are limited to buying stocks that produce dividends. So a 2 percent dividend might not only sweeten the ownership experience on a quarterly basis, but might also contribute to a rise in the stock price. I am long, long, long on Apple, and I don't want to sell a single share, but it would certainly be pleasant to receive some dividends while taking the ride!

  • Report this Comment On May 26, 2011, at 4:32 AM, Henry3Dogg wrote:

    The short term traders want Apple to return money to boost their share value now.

    The long term investors understand that the block of cash radically improves Apple's potential and reduces the chance of forced involvement in a price war. (only a fool starts a price war with someone with deeper pockets and higher margins)

  • Report this Comment On May 26, 2011, at 9:12 AM, techy46 wrote:

    Great article. I always wondered how these cash dynamos invested their billions of free cash flow. It would be very interesting to include Intel in your comparisons. I think Microsoft's investment in Facebook will eventually pay off quite well.

  • Report this Comment On May 26, 2011, at 7:29 PM, Borbality wrote:

    haha like AAPL needs a dividend to attract investors.

  • Report this Comment On May 27, 2011, at 10:33 AM, EquityBull wrote:

    At $335/share for apple and their growth rate and free cash flow the BEST use of the stock is actually to buyback their own stock. This would give the best ROI and internal rate of return by far.

    The stock trades ex-cash for under 10 times next years earnings yet it is likely to grow 50% plus in '12 and at least 30% in '13. Simple math shows there may be no other investment apple can make right now then in their own stock.

    Even if it does not move the share price immediately the reduction of share count will increase the EPS even further and increase shareholder value over time.

    They should announce a $30 billion buyback which would be about 10% of the float taken back in. Once that is done if the stock has not moved they could do another $20 billion. In the year it would take them to do this they would have generated enough cash flow to not even affect the current cash pile!

  • Report this Comment On October 11, 2011, at 1:07 PM, rcpaynewv wrote:

    Apple should take a significant amount of their cash and start a bank, then spin the bank off to its' shareholders.

    Apple should start selling its' OS on Desk top computers through Dell and HP. Their gross profit on OS as "air", like Microsoft would dwarf their gross profit on their hardware+software. And the software support, a profit making department would likewise be icing on the cake.

    And Fools, get a better word processing system for your "Add your comment" session. Actually the position cursor should always look like an I-beam, not a thin not very visible vertical line. And sometimes it is not even visible!

    And Fools, eliminate the garish moving ads and popups that make you really look like "Fools"

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