Why Apple Never Goes Big

It's no secret: Apple (Nasdaq: AAPL  ) is loaded.

Over the years, it has been steadily growing its cash hoard, and inevitably the discussion leads to the same question: What should Cupertino do with its mountain of money? The two most popular suggestions are always a dividend and ginormous acquisitions. The Mac maker now has $81.6 billion in cash and investments sitting on the balance sheet.

Apple Stock Chart

Apple Stock Chart by YCharts

This chart doesn't include long-term marketable securities of $55.6 billion, which are generally included in Apple's cash-equivalent figures, but the trend is clear.

You have to remember that as astounding as its coffers are, $54.3 billion, or two-thirds of the total, is sitting overseas, in part because of repatriation taxes. That leaves about $27.3 billion here stateside.

What about a dividend?
When it comes to a dividend, let's say the company wanted to start paying a one -- and it could under CEO Tim Cook. Other dividend-paying tech giants such as Microsoft and Intel pay dividends yielding around 3%.

With shares hovering around $400, even a more modest 2% yield comes out to $8 per share annually. There are just under 916 million shares outstanding, which would bring the total annual dividend bill to about $7.3 billion for the year. That's using more than a quarter of the cash Apple has domestically to work with. As a shareholder, I prefer the status quo.

What about acquisitions?
Just because Apple has a full magazine of potential elephant ammo loaded into its gun, that doesn't mean it should trigger-happily start unloading at anything that moves and looks remotely appetizing. Instead of using a shotgun or bazooka approach, Apple prefers to use a sniper rifle: uncovering smaller targets from afar and selectively picking them off with focused precision when the time is right, efficiently saving rounds for future battles.

Apple will never buy a company like video streamer Netflix (Nasdaq: NFLX  ) or game maker Electronic Arts (Nasdaq: EA  ) . Never.

Its largest acquisition to date was just this month, when it acquired Israeli flash-memory specialist Anobit for an estimated $500 million. A Netflix acquisition would top $5 billion, more than 10 times its biggest buy. EA would probably cost at least $8 billion.

The rumor mill has even targeted Sony (NYSE: SNE  ) , which has a $17.6 billion market cap. Don't even get me started on the Disney (NYSE: DIS  ) idea, since the iconic animator's market cap is $66.4 billion. That capitalization is already more than 130 times the Anobit acquisition, before you even include any type of premium.

The hit list
Look at the companies Apple has acquired, and you'll immediately see why big household names never fit the bill. Here are some acquisitions over the years and their estimated prices.

Year

Company

Estimated Price

Intended Use/Purpose

1996 NeXT Computer $404 million Steve Jobs, Mac OS X
2005 FingerWorks Unknown Multitouch
2008 P.A. Semi $278 million A4, A5 processors
2009 Placebase Unknown Maps app
2009 Lala $17 million iCloud, iTunes Match
2010 Quattro Wireless $275 million iAd
2010 Intrinsity $121 million A4, A5 processors
2010 Siri $200 million Siri
2010 Poly9 Unknown Maps app
2011 C3 Technologies $267 million Maps app
2011 Anobit $500 million Flash memory

This isn't a comprehensive list, but it shows some of the more important buys. Notice the absence of the word "billion" anywhere. Before acquiring Quattro, Apple was in a bidding war with Google (Nasdaq: GOOG  ) over AdMob, which Big G ended up winning for $750 million.

Steve Jobs had always favored small acquisitions of companies with solid technology that would allow Apple to build an offering from the ground up, as opposed to making a huge purchase of an established company that would be harder to integrate into Apple's culture. That's unlikely to change under Cook.

Keeping its acquisitions small is what allows Apple to have such a low intangible-assets ratio. Out of its current $116.4 billion in assets, only $896 million is goodwill and $3.5 billion is acquired intangible assets. That reduces the risk of having to eat goodwill impairments and other accounting charges if things don't turn out well -- just ask Hewlett-Packard (NYSE: HPQ  ) how much Palm hurt.

Acquisition speculation: the new baseball
If Apple wants to get into video streaming -- which it probably does in preparation for a real Apple TV -- it wouldn't buy Netflix. It would buy some small streaming shop you've never heard of that has a good technological foundation and could be easily integrated.

The same would be true if it wanted to get into mobile-game development and EA, but it doesn't. Cupertino recently pulled its only iOS game, Texas Hold 'em, from the App Store. Why take the risk within one of the most competitive platform environments when it can sit back and just collect its 30% cut?

Next time you hear some bizarre far-fetched rumor that Apple is thinking of buying some major brand name for billions of dollars, feel free to brush it aside. The stories are bound to come up periodically, since acquisition speculation in the stock market is becoming a national pastime. Just remember that pastimes are for recreational purposes only.

The mobile revolution is also set to become The Next Trillion-Dollar Revolution, thanks in part to Apple. There are lots of companies that are set to cash in on it, but one in particular has excellent prospects. The company is one of few players that will help power the mobile devices of the future, and it also has exposure to the explosive growth in China. As bullish as I am on Apple, I'm also bullish on this stock, and I've given it an "outperform" CAPScall. Get access to this 100% free report to find out what company I'm talking about!

Fool contributor Evan Niu owns shares of Walt Disney and Apple, but he holds no other position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Apple, Microsoft, Intel, and Google and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Netflix, Walt Disney, Intel, Apple, Google, and Microsoft and creating a bull call spread position in Microsoft. 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. The Motley Fool has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (34)

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 December 27, 2011, at 10:57 PM, dgresl00 wrote:

    "With shares hovering around $400, even a more modest 2% yield comes out to $8 per share annually. There are just under 916 million shares outstanding, which would bring the total annual dividend bill to about $7.3 billion for the year. That's using more than a quarter of the cash Apple has domestically to work with. As a shareholder, I prefer the status quo. "

    You are clearly forgetting that they are generating over $40B per year in cash flow with $15B+ generated domestically. Apple could pay a 4% dividend without batting an eye. They need to split 10:1, buy back 200 million shares, and institute a 3-4% dividend. If they want to make an acquisition, Wall St. would lend them up to $100B for 5 years at less than 3% and they can pay it back in two if they need to. It's time for the Board to stop the nonsense of status quo, let management focus on the business, and implement the above to boost the stock price. All management needs to know is that they have $50B+ at their disposal at any time to make acquisitions.

  • Report this Comment On December 28, 2011, at 1:28 AM, ConstableOdo wrote:

    Just think. Google purchased a questionable company like Motorola Mobility for $12.5 billion for basically IP rights and yet it didn't seem to hurt Google's share price at all. Google doesn't have nearly the cash hoard that Apple has. One thing for certain, Apple definitely doesn't like to give its personal cash hoard away and I doubt any shareholders are going to get their hands on it either.

  • Report this Comment On December 28, 2011, at 12:09 PM, buffalonate wrote:

    Apple was essentially a nobody five years ago. I think they remember that. That is why they choose to keep their war chest. With the huge amount of money they have they can weather just about any storm.

  • Report this Comment On December 28, 2011, at 1:35 PM, DBrown7 wrote:

    Apple's trailing 12 months free cash flow is $35.89 per share, considerably higher than the $27.68 of reported earnings. It's cash flow that is the important metric to consider when figuring what dividend the company can afford. I would also expect trailing 12 months earnings to be much higher when Apple reports in January. The December quarter for Apple is likely to show very significant growth. Whether or not AAPL decides to pay anything approaching a 4% dividend, I think it would be quite affordable.

  • Report this Comment On December 28, 2011, at 1:35 PM, Hawmps wrote:

    Last time I checked, the dividend is an expense to the company. Like it or not, it costs money to reward shareholders with a dividend (<--duh). Therefore the $406 price tag would likely come down once there is a dividned. It might pop up initially over the "excitement" factor of wow now there's a dividend, but it is still an expense to the company (and provides another measurement of valuation). So if $8 is +/-2% yeild at $406, then I'd argue that there is a new $8 expense, the $406 is instantly overpriced until the div yeild goes up to somewhere between 2.5% and 3% along with the likes of MCD, WMT, KO. Basically, if AAPL had the same payout ratio as MSFT, then the div yield should be slightly less than MSFT because of the perception of AAPL's dominence in the sector right now. It would be percieved as being less risk, or having more upside, and shoul dhave a slight premium baked into the price.

  • Report this Comment On December 28, 2011, at 2:00 PM, H3D wrote:

    "... The two most popular suggestions are always a dividend and ginormous acquisitions...."

    Strange. In the things I've read, share buy back in far more popular than ginormous acquisition.

  • Report this Comment On December 28, 2011, at 3:31 PM, akutach wrote:

    The title says you are going to tell us why, not just recount what they have and haven't done. Well??? 'Apple' is a good fodder to get people to click for the free report. I hate to be a cynic, but the last time people were complaining about too many insubstantial articles at MF that were just trying to sell a service was when the market hit the top. Perhaps I should be getting ready to profit on the way down...

  • Report this Comment On December 28, 2011, at 3:45 PM, TMFNewCow wrote:

    @akutach,

    This paragraph here answers the "why:"

    "Steve Jobs had always favored small acquisitions of companies with solid technology that would allow Apple to build an offering from the ground up, as opposed to making a huge purchase of an established company that would be harder to integrate into Apple's culture. That's unlikely to change under Cook."

    Leading up to that is evidence pertaining to Apple's acquisition strategy, and historical context that shows why large acquisition rumors don't fit Apple's M.O.

    Foolish best,

    -- Evan

  • Report this Comment On December 28, 2011, at 5:16 PM, dgresl00 wrote:

    @truthisntstupid - Are you really goind to look at trailing earnings for a company like Apple? Have you looked at their growth compared to Mr Softy and Intel? As per DBrown7, please look at their run rate cash flow and the fact they they do have $100/share in cash on the balance sheet. The analysts, who are always low, have them generating $38B in 2011 or $41/share in cash and $44B or $47/share in 2012. A $16/share dividend is easily done and the cash hoard will continue to build.

  • Report this Comment On December 28, 2011, at 5:35 PM, toneill69 wrote:

    No matter what one thinks value is based on future income and without a dividend there is really little value to apple stock.

    There is no good reason for not paying shareholders other than greed power whatever.

    anyone who thinks investors should not be paid is nuts. Most likely the are not the holder of the stock.

    Its even impacting the price of the stock which has been hoovering around $400 for some time-

    no dividend means no stock appreciation. as many of your writers have stated the best course is to pay a dividend and split the stock. They dont need to hoard

  • Report this Comment On December 28, 2011, at 8:49 PM, knighttof3 wrote:

    I'd like a Like button (or "Recommend it" before Facebook sues TMF) for truthisntstupid's comments.

    Apple is still "hot" and selling at higher P/E than "lukewarm" techs like MSFT or INTC. No one can see the future but buybacks at this price would not be prudent.

    Google's successes include the search engine, Chrome browser and Android OS. And a lot of flops, including Google Plus. What is to say that Apple without Jobs won't have the same run-rate as Google and have 90% of its ideas flop?

  • Report this Comment On December 28, 2011, at 10:45 PM, eksummers620 wrote:

    I like the notions of a special one-time dividend. A few reasons:

    - It would reward shareholders

    - It would get some of the excess cash off the books

    - The inevitable dividend reinvestment would drive the stock higher

    - Random, one time dividends would keep with the culture of Apple: secret, unpredictable.

    I think a share buyback is asinine:

    - Buybacks are great if you want to raise your EPS but GOOG is their only competitor to out perform Apple here.

    - CEOs are also victims of falling for buybacks because it asserts their position without committing to much but Cook was handpicked by Jobs so no one questions his ability.

    - To keep with the article's theory, a buyback is no different than investing in another company. As the author states, Apple doesn't spend big dollars on investing in buying other companies. Why would they buy more than the status quo of other companies?

  • Report this Comment On December 28, 2011, at 11:35 PM, Clint35 wrote:

    Maybe Apple could hire some lobbyists to get rid of the repatriation taxes. That would help with part of the problem.

  • Report this Comment On December 29, 2011, at 4:34 AM, akutach wrote:

    Evan,

    I shouldn't have been so harsh in criticizing your motivations, my apologies.

    While that sentence lays out the why of the past, it lends no insight to why never. The scenario has changed for Apple: their ROIC on operations is fantastic, but their return on investments has to be comparatively horrible. I don't know what it is, but presume it's a mix of cash/treasuries (~1/3 at near-zero return) and a basket of longer bonds, equities and small direct investments). They can't make 50+ profitable sub-billion dollar acquisitions that fit within their core. The more money Apple accumulates the more their financial performance will look like their investing performance. I'm guessing many of their investors don't seek investments that perform like treasuries.

  • Report this Comment On December 29, 2011, at 8:52 AM, TMFNewCow wrote:

    @akutach,

    I appreciate the more substantive feedback with some very valid points. The concern of Apple's hoard earning next to nothing in yield is legitimate, but at the same time I don't believe that should spur the company to make any hasty acquisitions.

    Gauging the return on some of the acquisitions is harder to quantify and is somewhat indirect, since some are usually not monetized directly and mostly contribute to Apple's moat and differentiation (for example, Siri was supposedly ~$200 million, and it's hard to put hard figures on how much Siri has helped sell the iPhone 4S).

    Anobit would probably be easier, because Apple could probably internally compare how much they're saving by having its flash specialties in-house now compared to before. This article is really more focused on the acquisition strategy instead of the dividend possibility, and small & specialized acquisitions (which carry less risk) are likely to remain Apple's targets under Cook.

    As far as what to do with its hoard, that's fodder for another day.

    Foolish best,

    -- Evan

  • Report this Comment On December 29, 2011, at 12:20 PM, DJDynamicNC wrote:

    @Knight - I realize it's off topic and I apologize for derailing the thread, but I can't let the "Google+ is a flop" comment stand. Google+ is a beta, not a flop.

    The way Google+ is integrated with Android makes it clear that Google intends its social network to be primarily mobile based - and it's working, because I use Google+ almost exclusively on my phone (the Facebook app is garbage). With smart phones poised for continued substantial growth, and Google+ now a default sign-up for new Android users, and a simple uncluttered interface, and Facebook constantly mucking around with its layout to its users frustration, I think Google+ has barely begun to get its legs underneath it.

    Granted, I could be wrong.

  • Report this Comment On December 29, 2011, at 3:34 PM, akutach wrote:

    So Apple has too big of a hoard to put it to good use acquiring tech companies. I propose they go after the financials market. Their devices have the ability to (already have begun to) transform commerce by completely replacing the credit card. Not by entering unsecured debt market, just transaction facility. They need to be ahead of the curve on security and this is where they need to spend. They and Android should take over the small consumer based transaction market from MC/Visa. I can't see how the existing card issuers can do anything to stop them. I'm not sure how much money that will require. Buying an existing card company would NOT be the way to do it, but just for a bit of perspective they could buy Visa at its current valuation.

  • Report this Comment On December 30, 2011, at 6:14 PM, PanzerWatts wrote:

    Apple needs to institute a dividend.

    a) share buy backs at the current share price is an obviously poor use of assets

    b) as the article clearly lays out, Apple is not going to make any large acquisitions and holding onto $25B for the occasional $250-500 million purchase is ridiculous

    What else is Apple going to do with the money?

    Seriously, why is Apple holding this much money? It really has no purpose for holdings of this size other than inertia.

  • Report this Comment On January 01, 2012, at 1:26 AM, ButtBiscuits wrote:

    I still think that Sony would be a great pick up for them. They already have the casual game market covered, and owning the playstation brand would give them automatic clout in the real hardcore market... maybe even Onlive would be a good pickup.

    If Apple wants their new super secret TV to be the hub of everything media in the living room, they are going to have to be a serious player in the gaming world. What better way than to jump right in with a brand that is well respected. Sony owns a helluva lot of patents too. I'm sure they could find good use for a lot of them.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1749206, ~/Articles/ArticleHandler.aspx, 10/23/2014 2:18:21 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement