Not Enough, Apple

Apple (Nasdaq: AAPL  ) announced its first dividend since 1995 yesterday. That's great news for shareholders, who are now entitled to some $10 billion of the company's cash every year. For perspective on how far and fast the company has grown, those who purchased Apple shares in 2003 will recoup their initial investment with every annual dividend payout.

But it isn't enough. Even with a share-repurchase program also announced yesterday, Apple is hardly making a dent in its bank account.

By the company's calculation, the dividend and share repurchases combined will cost $45 billion over the next three years. Yet according to analysts at Sterne Agee, Apple will generate $75 billion to $80 billion of free cash flow over the next year alone. At that rate, even with yesterday's announcement, Apple's cash hoard is likely to grow to $150 billion next year, and perhaps $250 billion by 2015. By then, Apple could fund its dividend and buybacks, buy New Zealand (literally), and still have one of the largest cash cushions in the world.

"Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business," said CFO Peter Oppenheimer. Understatement of the year.

Apple, in other words, hasn't solved what some see as its biggest (if not only) problem: what to do with its cash.

And a real problem it is. Apple earned an average return of 0.77% on its cash and cash equivalents last year. With inflation tracking at 3%, its cash is losing value in real (inflation-adjusted) terms at a rate of more than $2 billion per year. That's more than the company earned in annual profit as recently as 2006.

Some note that yesterday's announcement was just the opening salvo, and the quarterly dividend of $2.65 per share can and will be raised. But even if Apple doubles -- heck, triples -- its initial payout, the $100 billion cash hoard will continue to grow substantially. And with news of 3 million iPads sold on the opening weekend, to say nothing of the prospect of Apple TV on the horizon, current estimates of cash-flow generation may prove too pessimistic (though those can be famous last words).

Apple needs to do something else with its cash -- far bigger and more ambitious than yesterday's announcement.

That may eventually mean an acquisition. After paying its dividends, Apple can still afford to purchase nearly any technology or media company. There are a mere 85 companies in the world with a market cap above $80 billion, or more than Apple could reasonably acquire with cash. Fewer than 10 are even tangentially related to its business.

More likely is a massive one-time special dividend, as Microsoft (Nasdaq: MSFT  ) issued in 2004. Back then, Microsoft sat on $60.6 billion of cash and parted with $33 billion of it in one fell swoop. The equivalent for Apple today would be cutting a check for about $55 billion, or around $50 a share.

In fairness, some of Apple's relative timidity no doubt stems from burdensome tax laws. Cash held in foreign subsidiaries -- about half, in the case of Apple -- is subject to repatriation taxes if brought back to the United States. That can total 35% minus a credit for foreign taxes already paid. Some analysts and companies are holding out for a repatriation holiday, as took place in 2004. Others, including myself, think repatriation taxes should be ended altogether, switching instead to a territorial system that taxes income only where it is earned, as nearly every other industrial nation does.

But there comes a point where citing repatriation taxes is no longer a valid excuse to deprive shareholders of cash. If there is no repatriation holiday, and a territorial tax system is not in the cards (both likely for the indefinite future), will multinationals like Apple never return cash held overseas? Truly, never? If so, then a company's foreign operations are literally good for nothing in shareholders' eyes. The bullet will have to be bitten eventually.

Great start, Apple. But it's not enough.

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Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter, where he goes by @TMFHousel. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple and creating bull call spread positions in Microsoft and 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. The Motley Fool has a disclosure policy.


Read/Post Comments (12) | Recommend This Article (20)

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 March 20, 2012, at 11:27 PM, Turfscape wrote:

    Apple should buy Adobe outright. That should only use up a small portion of their cash, leaving them free to increase dividends in the future.

    But, buying Adobe would allow them to fully integrate the Creative Suite into the OS for truly amazing, lightning fast rendering of graphics, images, illustrations, etc. Plus, they could finally, fully kill off Flash.

  • Report this Comment On March 21, 2012, at 12:31 AM, carla01j wrote:

    I noticed, Morgan, that you own 0 shares of Apple stock. Your criticism of Apple's dividend and buyback decision would carry more weight if you were a shareholder. AS A SHAREHOLDER, I am quite pleased with their decision. By the way, where did not get your information that half of Apple's cash is overseas? Most analysts I've read have reported that more than 2/3s of the cash is offshore.

  • Report this Comment On March 21, 2012, at 12:38 AM, Chilaw wrote:

    Morgan,

    I love your macro-econ articles, but I think you are pushing it a bit here.

    For starters, you picked the most optimistic cash prediction out there. In contrast, some analysts are predicting a cash hoard much closer to 100-120B for next year. Also, you are extrapolating past growth forward, and forgetting that the iPad and iPhone are maturing products that will come under increasing competition in the coming year. There is a reason the APPL TTM P/E is 15-16, yet you are smarter than the market and predict faster growth.

    As an APPL shareholder, I hope you are right but not sure it makes sense in this analysis.

    Next, you forget that Apple will need to commit an outsized investment if they are going to take over the TV market. I think you have it backwards when it comes to the cash. This new venture isn’t going to mean instant billions to the cash hoard, but more likely, it will tie up vast sums of cash in their global supply chain. Just think about that expensive $80 Retina screen on the new iPad--now imagine it on millions of 42 inch TVs. You say: [Without repatriation] a company's foreign operations are literally good for nothing in shareholders' eyes. This is how they will use their overseas cash to benefit us shareholders.

    As you mention, dividends can and will be increased. Why not start conservatively and bump it up over time? Growing the div is a big way to earn the market’s trust over time—better that than a big, splashy one-time payout or an overly optimistic promise that they can’t keep in five years time if the hit parade ends. Unlike Microsoft with its recurring licensing revenue, Apple needs new product hits to earn that future cash. Post Jobs, maybe they can keep it going, but...maybe not.

    Finally, Tim Cook needs to tread a fine line between making Apple his company and respecting the successful Jobs legacy. Jobs was vehemently opposed to the div. By waiting about six months and reversing that with a 1.8% div, I think he walks that line fairly well.

  • Report this Comment On March 21, 2012, at 1:36 AM, joshimm1 wrote:

    The more you give, the more they want. It is greed all around.

  • Report this Comment On March 21, 2012, at 4:14 AM, wrc99 wrote:

    You remind me of my ex. "I want a dividend." Here is your dividend. "It's not enough." I will increase it over time. "It's not enough." "It's not enought." I as an Apple shareholder am happy to receive a dividend. I also am happy that you pointed out one thing. Apple is still a growth company. That was my main reason for investing in the first place.

  • Report this Comment On March 21, 2012, at 11:28 AM, Kingston11 wrote:

    How about a "windfall profits" tax like the one that was applied to the oil companies in the past? Why should Apple be allowed to make so much money? Isn't that the economic reasoning of so many of our Democratic friends. Or, they could always cut the cost of their iPads so more people could afford them. I can think of all kinds of ways that Apple could reduce their cash.

  • Report this Comment On March 21, 2012, at 1:08 PM, Mega wrote:

    "buy New Zealand (literally)"

    Not literally. It's impossible to buy a country, and even if it was, New Zealand is worth much more than their annual GDP. GDP is not an amount, it's a flow.

  • Report this Comment On March 21, 2012, at 1:11 PM, TMFMorgan wrote:

    ^ I thought about that after publication. "Buy a year's worth of New Zealand's GDP" would have been better (and accurately) phrased.

  • Report this Comment On March 21, 2012, at 7:58 PM, CashRulez wrote:

    I don't agree with the title but I love how you always challenge us to "Think Different"

  • Report this Comment On March 22, 2012, at 12:35 AM, TMFMorgan wrote:

    ^ Thanks!

  • Report this Comment On March 23, 2012, at 12:00 PM, trejz wrote:

    I think those who believe AAPL giving a dividend is something they "owe" investors and should be cheered as "giving back" are all late-comers who bought what they couldn't afford and/or investor-pandering media-types who want a story. If I chose to sell, I would make 385% on my AAPL investment, THAT is something that they have given me back and it's all I ask of them. We investors don't own anything when we buy shares except the paper/digital acknowledgment we bought "shares", as we all would find out if tomorrow AAPL went belly up. They owe us nothing of what the company has earned, neither legally nor morally. The reason they have been able to give this return back to me is that they have taken risks and made smart moves, virtually cornering the tablet market and making almost all the money being made on smart phones. The money that they have earned for the company by doing this gives them a cushion to take the risks they did since the mid-2000s, allows them an agility that their followers do not have. It is a horrible decision to sacrifice this advantage for the sake of making nice to Fools, Motley or otherwise, Jobs wouldn't have done it, and it's a sad day that Cook was crowned King since he is a watery Steve imitation in a mock turtleneck. Agility is everything in their industry, lack of it is what makes MS lag and the loss of it would make them into followers like the rest of the crowd, bringing them back into the fold of mediocrity. So to a dividend, I say no thank you, take the money and make the company stronger and make my shares more valuable. If I need a anything back immediately I can sell a share or two and buy it.

  • Report this Comment On March 23, 2012, at 1:20 PM, slpmn wrote:

    Great points raised in that article, and laughably sad comments by a couple of Apple shareholders in the dicussion.

    Folks, the point of the article (and Investor Finance 101) is that Apple's gigantic pile of money isn't doing anything for you the shareholder. It isn't generating any material return and most importantly, isn't necessary for R&D to keep the product gravy train rolling. It is just sitting there. The logical, economic thing to do is return the excess to shareholders so you can reinvest it in another company that needs cash to grow. Or, take it and buy more Apple if you want. That balance of choices is literally the foundation of capitalism.

    When it comes to discussing whether the company should pay out a big fat dividend or not, the fact the shares have had great capital appreciation is irrelevant. You can have both, and as owners of the company, you should demand both.

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