Apple's $136.8 Billion Question

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Apple (Nasdaq: AAPL  ) is like a Mexican pinata, stuffed full of cash. The Cupertino tech giant is just afraid to swing its own stick.

Few investors see Apple's growing cash balances as a problem. Every passing quarter finds the company with billions more in its coffers. It had $51 billion in cash, equivalents, and marketable securities at the end of fiscal 2010. That number rose to $59.7 billion three months later, and $65.8 billion six months later.

Apple isn't going to stop making money. It's selling millions more iPads, iPhones, iPods, and Macs with every passing quarter. In Ticonderoga Securities analyst Brian White's model, Apple will be sitting on $136.8 billion in greenery by the end of fiscal 2013.

No company -- and certainly not Apple -- needs that kind of cash cushion. Even saving for a rainy day of Noah's Ark proportions wouldn't require an emergency stash that big. However, Apple's mindset in 2013 isn't likely to be all that different from its thinking right now:

  • No dividend.
  • No massive share buybacks.
  • Limited acquisitive activity.

I realize that payouts are flags of surrender in the tech world. If there's a jump-the-shark moment among tech juggernauts, it's usually when they begin cutting quarterly dividend checks. Cash-rich Cisco (Nasdaq: CSCO  ) didn't initiate a divide policy until three months ago, long after the last growth investor had fled the tattered networking-gear giant. Microsoft (Nasdaq: MSFT  ) waited until it was knee-deep in its lost decade to begin sharing its bountiful stash with investors. 

If the mother of all share repurchases seems like a more plausible idea, consider that it's just $90 billion in market cap away from Exxon Mobil (NYSE: XOM  ) -- and it's already far greater in enterprise value. Do you really think that Apple, the country's second most valuable company, wants to shrink its share count when it's a good year or two of growth away from overtaking the top dog? 

Sure, shareholders would enjoy some pocket change. Of course they'd relish the accretive nature of a healthy buyback. But neither scenario is likely to happen, even if Apple is collecting a pittance in interest on its idle cash.

That leaves acquisitions as the best reason for Apple crack open its fattened piggy bank, but the clock is also running out on that front. Apple is already too big to make a material purchase that won't get intense scrutiny from antitrust regulators. Besides, who would it even buy at this point?

Apple's success has given rise to its own inescapable girth. The class of Cupertino is trapped in money -- and it can't get out.

Who do you think would Apple buy at this point? Share your thoughts in the comments box below.

The Motley Fool owns shares of Microsoft and Apple and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems, Microsoft, and Apple, as well as creating a diagonal call position in Microsoft and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Longtime Fool contributor Rick Munarriz always bets the over when it comes to Apple. He owns no shares in any of the stocks in this story and is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Motley Fool has a disclosure policy.

Read/Post Comments (15) | Recommend This Article (11)

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 June 14, 2011, at 6:59 PM, steveonyx wrote:

    Good article. It is really hard to imagine to what good end Apple will put its hard earned cash. I suppose it props up the share price by $50/share or so, but it could be put to much better use by a buyback or a dividend.

    Under almost any scenario, the cash hoard is working against Apple at this point.

    I love the Apple products and I'm making great money on the stock, but the pile of cash is one mark against this great company.

    Check out my profit on trading this stock over the last 12 months:

  • Report this Comment On June 14, 2011, at 7:18 PM, Darkkewlz wrote:

    I think, Apple is Saving up to buy Microsoft.

    They might have enough now, but want a cushion for the aftermath. They probably will buy it, then dissolve it. Only then can Jobs truly be King. lol

  • Report this Comment On June 14, 2011, at 8:20 PM, tonyleonard wrote:

    Apple should purchase Nintendo

  • Report this Comment On June 14, 2011, at 8:50 PM, ConstableOdo wrote:

    Apple should purchase Google then stop all development of Android and that would shut up all the freakin' analysts talk about Android taking over the mobile world, once and for all.

  • Report this Comment On June 14, 2011, at 10:58 PM, eclecticfool01 wrote:

    The key question is, has Apple developed the processes and management structure that would allow the company to be as innovative as it currently is, without Steve Jobs at the helm? If it has not, Apple is bound to end up like other fine tech companies, starting with xerox, srint, cisco, microsoft, and on just to name a few. IBM in my book has been one of a few tech companies that was able to remake itself and still grow.

  • Report this Comment On June 15, 2011, at 12:24 AM, techy46 wrote:

    Apple should be investing in beaten down tech giants like Intel, Micosoft and Nokia so that when this economic mess clears up it has made it's stockholders even more ROI that if they'd rotated into those laggards. After that, split 10x, pay good dividends and relax.

  • Report this Comment On June 15, 2011, at 8:33 AM, deemery wrote:

    Apple's cash holdings don't seem to be a problem to -Apple-, but this seems to bother the dickens out of business commentators and investor blogs. Apple has been quite successful using that cash cushion to get favorable prices on materials, and maybe it'll buy a company that contributes to Apples -LONG TERM- vision.

    There's an old saying, "If it ain't broke, don't fix it!" And in particular, don't break the success of Apple creating new markets with well designed products that take time to develop, by chasing the typical short term results that screws up most companies.

  • Report this Comment On June 15, 2011, at 1:48 PM, jargonsays wrote:

    Apple is not trapped but they should be wise to offer a dividend sooner rather than later. And it should be before investors really start selling the stock on any and every sign of growth weakness. At this point growth will be good but it will begin to slow down over the next few years, and there is the possibility of an unexpected more severe weakness. Big investors will begin questioning the size of their holdings and reduce exposure. So they have billions, but how does it help investors? What could they possibly purchase with this cash that strengthens the core brand and not be accused of some sort of monopoly?

  • Report this Comment On June 15, 2011, at 2:09 PM, jekoslosky wrote:

    Oh, what a dilemma to have. It's not as if Apple is sinking too little money into research and development. It's product pipeline is plenty healthy. If it had tons of cash on hand but seemed to be neglectful in those areas I'd be worried. I think Jobs and crew will eventually find a good place for that money.

  • Report this Comment On June 15, 2011, at 4:03 PM, avidmac wrote:

    Probably best to offer advice to companies that really need it. Microsoft leaps to mind.

  • Report this Comment On June 15, 2011, at 7:46 PM, rfaramir wrote:

    How about an in-kind dividend option? While I'd have to take a cash option for my IRA investment in AAPL, if I owned shares directly, I'd love getting some iPod Touches or iPads to distribute to beloved relatives and friends each holiday. Getting more people hooked on Apple products could only be a good thing, and this kind of dividend would keep them from looking stodgy (like other dividend payers) and keep them looking 'cool'.

    Someone mentioned purchasing components in bulk ahead of time. This is especially important when inflation will eat away at the value of their cash while raising their component costs. Spend it now while it's worth something!

    While we're at it, purchase (some of) the companies that make the components. Samsung (or a competitor) for flash chips to start with. Maybe a silver miner that pays in-kind dividends for the electronic conductor use of silver in their products? TSM, who makes MacBooks for them?

    The foreign companies in particular are good targets for using the cash that is stuck overseas due to high US taxes on repatriating profits. Heck, just buy some Chinese gold, store it in Hong Kong or Japan, and wait for the US dollar to collapse. Just don't hold dollars, please! It's dangerous!

  • Report this Comment On June 16, 2011, at 3:18 PM, AnthemFool wrote:

    Apple should buy a company that makes TV's so they can further integrate the living room into their ecosystem. Sony comes to mind since Sony also owns content that Apple could distribute through iCloud. That would also give Apple leverage to negotiate deals with other content providers.

  • Report this Comment On August 02, 2011, at 7:17 PM, f4ftrjoc wrote:

    AAPL'S cash of 76.5 Billion is Off Shore. Any deal that AAPL does here, that sum would be Taxed.

    The USA should give AAPL a no tax on all sums paid out to investors. Why? Because the In vest-ors would pay tax on their received funds and thus there would be Hundreds of millions refloat-ed back into the streets....

  • Report this Comment On August 02, 2011, at 7:40 PM, TMFTomGardner wrote:

    Apple should create a Global Investments division, designed to boost the return on its cash, while diversifying away from the dollar. Also, remember that Steve Jobs has probably guided people internally that he wants Apple to flourish for all of the next century. Having a massive cash cushion does NOT indicate oncoming gains in the valuation of your business. But it does boost the chances that you'll endure any and every storm in your marketplace. That's why I think they should build up an expertise in global enhance their long-term returns while not weakening their chances of living for centuries.

  • Report this Comment On August 02, 2011, at 8:26 PM, TheDumbMoney wrote:

    "Do you really think that Apple, the country's second most valuable company, wants to shrink its share count when it's a good year or two of growth away from overtaking the top dog?"

    I don't get the market cap thing. Are you really suggesting Apple should not buy back shares because it should want to have the largest market capitalization? How does having the largest market capitalization add any value to shareholders? If in fact Jobs is refusing to do a large-scale buyback program just because he wants the largest market cap, then on a daily basis he is destroying shareholder value for the sake of his ego.

    (Does buying back shares even necessarily reduce market cap? -- doesn't it depend on how the buyback is accounted, or whether they are officially retired or held as treasury stock or something? -- seriously, I don't know for sure, just remember reading something about it, though I follow your presumption that it reduces market cap.)

    Anyway, hopefully Apple's reasons for holding so much cash (above what it reasonably needs to weather marketplace storms) are better than that.

    Either: 1) there is a master plan for a future acquisition, or to hold it until interest rates go up and then invest in longer-term securities, or 2) holding that much cash is just as much an admission that the company has no clue what to do with that money as is paying money out as a dividend.

    As far as creating a Global Investments division, I think more of a venture capital focus might be good. Otherwise, if they hire anyone from just about anywhere, one of the top stocks that person is likely going to want to buy is Apple, because it's growing like crazy and likely undervalued. Rick, if you worked for such a division, wouldn't you want to buy Apple stock? Which just gets one back to the question of why the company with the best knowledge of how Apple is doing and is going to do has not done significant share buybacks of Apple shares in the last two years or so.

    Long Apple. Maybe I'm missing something. I often am.

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