When Bill Gates started Microsoft (Nasdaq: MSFT ) , he knew he needed two things in spades: smart people, and cash. Too many companies forgot about the latter. The technology world transformed so quickly that not having enough cash to change course ruined many.
"I soon came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year's worth of payroll even if we didn't get any payments coming in," Gates once said while CEO. "I've been almost true to that the whole time."
Microsoft has been berated for its cash hoarding. But Apple (Nasdaq: AAPL ) has taken things to a whole new level. With $76 billion in the bank, Apple has enough cash to pay its overhead expenses for 14 years without a dime of revenue. Steve Jobs makes Bill Gates look like a gambling man.
There aren't enough superlatives to describe Apple's cash hoard. If Apple's bank account were a country, it would be 64th largest in the world, ahead of the annual output of Ecuador, Croatia, and Luxembourg. If its bank account were a standalone company, it would be the 34th largest among the S&P 500. If interest rates rise to pre-crisis levels and Apple can earn 5% on its cash, the interest income alone would generate more profit than all but 45 American companies.
These numbers are unequivocally absurd. Apple has to do something big with its cash. So far, management has hinted at acquisitions. "We strongly believe that one or more very strategic opportunities may come along that we can take that we're in a unique position to take advantage of because of our strong cash position," Jobs said last year. But cash levels are so high that acquisitions might not make more than a dent. There are fewer than 100 companies with market caps over $50 billion, and of those, very, very few are in the media or technology space. Further, some $8 billion to $10 billion is being added to Apple's hoard every 90 days. It's doubtful the company will be able to dispense with its cash on acquisitions alone.
That raises the question: Will Apple pay a dividend?
From an investor standpoint, it should. One of the fastest-growing large-cap companies in the world, Apple trades at a decidedly dismal multiple of 13 times forward earnings. That's barely on par with the market average, and it's lower than many companies whose prospects don't come close to Apple's. The likely reason: no dividend. Last year, value investor Bill Miller noted that the telecom industry grows at one of the slowest rates but trades at the highest valuation. Why? Because it focuses on dividends. The technology sector is one of the few bright spots in the economy but trades at one of the lowest valuations. Investors pay up for growth, but they go nuts for big dividends.
How big could Apple's dividend be? Paying out half of its free cash flow could support a dividend yielding more than 4% at current share prices. This wouldn't even touch its $76 billion hoard -- the 4% dividend could be paid out of earnings even while adding billions to its war chest.
Odds are the market wouldn't let that yield stay at a lofty 4%. Not for a company that grows like Apple. A more reasonable 2% dividend yield would require bidding shares up to double their current levels. At that point, Apple would become the most valuable company in the world by far. As it should be. Have you been to an Apple store on a Saturday morning?
So why doesn't Apple dive into dividends?
Two big reasons.
First is repatriation taxes. More than 60% of Apple's cash was held overseas at the end of last year. To use this money for dividends or buybacks (or even domestic acquisitions), it would owe repatriation taxes to the IRS. That could cost billions. Apple is among other international giants such as Oracle (Nasdaq: ORCL ) , Cisco (NYSE: CSCO ) , and Pfizer (NYSE: PFE ) lobbying hard for a repatriation holiday, which would let companies bring foreign cash home virtually unscathed. These holidays have been granted in the past, most recently in 2004. Others are pushing to get rid of repatriation taxes altogether, as Canada, Japan, Germany, and France already have. It wouldn't be wise for Apple to do anything big with its cash until there's more clarity on this issue. So it waits.
More controversially, investors should look at Apple as the antithesis of General Motors (NYSE: GM ) . GM lost its way when engineers and design techs were pushed aside by MBAs and bean-counters. Apple found its success focusing obsessively on creating the best products in the world, end of story. The company is run by design geniuses. And geniuses they are; they've created one of the greatest brands in the history of business. But because their focus is so product-driven, I get the feeling management isn't losing much sleep over maximizing shareholder value. My colleague Rich Greifner was more blunt: Steve Jobs couldn't care less about you.
That attitude explains why Apple is so successful, but it also might explain why it doesn't pay a dividend.