Even in the land of the free, sometimes you still don't have a choice.
Apple's (NASDAQ: AAPL ) annual shareholder meeting takes place Wednesday in Cupertino. Just days before the meeting, David Einhorn was able to score a symbolic victory in his legal battle with the Mac maker and Apple is being forced to remove the vote over "Prop 2" from its proxy as a result, since the proposal bundled three different amendments to Apple's corporate charter that were intended to improve corporate governance.
The larger issue at the heart of the dispute was Apple's swelling cash balance, which has grown to absurd levels of $137.1 billion -- larger than the entire market caps of other tech and telecommunications giants like Intel, Amazon.com, Qualcomm, or Verizon Communications.
As the iMoney mountain grows, so does investor discontent, since that cash isn't doing a lot of good idling on the balance sheet. In fact, quite the contrary is true. The inflated asset and equity values on the balance sheet are a drag on several financial metrics that investors carefully track, such as return on equity.
We have too much money
The problem that Apple is running into is simply that it makes too much money and doesn't give enough back to its shareholders, relatively speaking. Apple has now explicitly said that it reached a point "early last year" that it had more cash than it needed to fund operations and maintain strategic flexibility. That was $40 billion ago.
That's precisely why Tim Cook made the move to re-initiate Apple's dividend after a 17-year hiatus and institute a share repurchase program to offset equity dilution related to share-based compensation. However, even as the $45 billion that Apple plans on returning to shareholders ranks high in absolute dollars, Apple's sheer cash-generating capabilities make that figure seem paltry.
Just look at the sliver of cash that Apple has given back so far.
Source: SEC filings. Calendar quarters shown. Cash returned includes dividends and buybacks.
This chart doesn't include the roughly $3 billion that Apple has returned so far in 2013 ($2.5 billion in dividends and $500 million in buybacks in the first quarter). That brings the total cash returned thus far up to $10 billion, nearly a year after the programs were initiated.
We make too much money
Apple's cash flow is nothing short of astounding at this point. Both operating cash flow and free cash flow in its fiscal first quarter alone were greater than all of fiscal 2010.
Source: SEC filings. Fiscal periods shown.
At the rate at which Apple is collecting cash relative to the rate at which it's giving back to shareholders, Apple simply has no choice but to increase its payout. What form this takes remains to be seen -- be it an increased yield on the common shares, a large special one-time dividend, a new class of perpetual preferreds like what Einhorn proposes, an increased buyback authorization, or some sort of combination of all of the above.
We can't do nothing
The only thing that Apple can't do is nothing, since it should be painfully obvious that an investor revolt is happening as we speak.
Not only are growth investors dumping their stakes as they question where future iPhone growth will come from, but also Apple's yield isn't generous enough to attract value investors en masse. Most of those types of investors still prefer the comfortable 4.4% and 3.3% yields of Intel and Microsoft, respectively, despite their questionable growth prospects.
While Einhorn's frivolous lawsuit is certainly a distraction and arguably part of a broader ploy to catalyze action, it serves as evidence that the status quo of conservative payouts and cash hoarding is no longer acceptable.
Apple certainly faces some challenges with how to increase its dividend, as most of that money is overseas, but rest assured it will start giving more back to shareholders. It has to.
There is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
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Report this Comment On February 26, 2013, at 9:19 AM, Morgana9 wrote:
Although Marc08 was a little rude, I do agree that the article is severely myopic.
I am an investor in AAPL and bought it, in part, because I respect the management of aapl but mostly because I like the products. Investor revolt? Get real!
Einhorn is now beginning to look silly. He certainly does not speak for me! He is trying every trick in the book because his investment in aapl has lost money so far and he does not have the patience to support his own choices.
Report this Comment On February 26, 2013, at 10:47 AM, hemhog wrote:
Apple's future will become clear in due time. It will be a very bright future.
Report this Comment On February 26, 2013, at 2:30 PM, Darwood11 wrote:
The one question I ask is, what would Warren Buffett do in this situation? Let $137 Billion sit out there, or put it to use?
But then, I guess I'm comparing a potato to an orange?
Report this Comment On February 26, 2013, at 5:56 PM, frogburger wrote:
I'm surprised that he didn't advocate for the US gov to raid Apple's money to fix the deficit.
I wish the US gov was managed like Apple was and creating the same value.
Wishful thinking.
Report this Comment On February 26, 2013, at 6:13 PM, holosys wrote:
Do you take me for a complete fool?
Apple is going to dispurse that $137 billion cash balance in higher executive salaries, bonuses and other methods to make executives richer.
They will be so rich that they will pray the Apple board and shareholders essentially fires them! You think they want to waste their time in a fancy corporate office when that time can be "better spent" on the golf course or at one of their overseas mansions?
Anyone gullible enough to hold Apple stock is itching for Apple to take them for a ride.
Report this Comment On February 26, 2013, at 6:14 PM, tkell31 wrote:
For those too dumb, or just deliberately obtuse, to understand what "investor revolt means" it is a reference to the share price drop from $705 to $448 or so which in fact would indicate people are selling ie not happy with the company. For those of use without a crystal ball to know the future holds it would be nice to see the company be more shareholder friendly with their cash horde.
Absent buying a small country for shareholders to retire too I cant see a purpose behind keeping that much cash so lets increase the dividend to a competitive level 3%+ and get on with making money. Not sure I see the point in a special dividend since that would just encourage people to own the stock long enough to pick up the larger payout. A large dividend increase can still be covered easily without touching cash overseas, rewards holders of the stock instead of traders, and would attract another class of investors to hopefully improve the share price. Obviously long term only continued quality products will move the price so we'll see what happens.
Report this Comment On February 26, 2013, at 6:18 PM, EquityBull wrote:
Apple does have a choice. Keep the cash. Do a mock dividend raise of a couple bucks to shut everyone up. Keep hoarding and then use it one day to keep the company afloat once it starts to burn instead of generate cash. That day will come. We just don't know when. And when it does Cook wants to be sure he can plug the holes and keep the heartbeat alive or at least a floor on the stock so his 5 and 10 year options have value!
Report this Comment On February 26, 2013, at 6:32 PM, sellsior wrote:
Haven't you heard - the now generations montra is:
Too much is not enough?
Report this Comment On February 26, 2013, at 6:32 PM, digndig wrote:
Many of todays sellers bought late and are now losing money. Those who bought at $50-300 are trying to decide if they should sell to lock in those gains before aapl falls further BUT ITS A COMPANY THAT EARNS $40B IN PROFITS AND HAS ENOUGH CASH TO BUY EVERY TRADED GOLD COMPANY. Talk about value. Maybe thats why we will never go back to a gold standard
Report this Comment On February 26, 2013, at 6:42 PM, maestro7 wrote:
I'm perhaps a little confused as a minority shareholder in not many AAPL shares (my cost basis is $138/share, for further context).
Is the money on the balance sheet Apple's money?
If so, why does Apple have to do *anything* with it?
I really don't understand, unless some investors are just mad that they initiated their position far into the $500 range. If this is in fact the case, then that's not Apple's problem, and the onus is on the investor as to whether they believe Apple is a reasonable investment, going forward.
This is the equivalent of a segment of the American population griping that people who make greater than $500k/year shouldn't keep all of their money.
Oh, wait -- there are malcontents who already do that!
Maybe I just answered my own question..
Report this Comment On February 26, 2013, at 6:55 PM, luxetlibertas wrote:
Tim Cook - in baseball terms - only likes to hit when he's almost sure of a home-run. The absolutely relentless criticism of everything that Apple does - even the most brilliant products and strategies are badly received until the moment their success cannot be denied anymore - exacerbates that tendency.
But if you don't allow yourself to fail, that's an impediment to innovation. And it also can cause yearlong delays in necessary decision making on thorny problems. The mountain of cash represents a 'decision making debt' of several years.
Apple has to catch the spirit of nimble entrepreneurship again, it might for instance create an icubator-fund for promising technology-related initiatives, providing capital, know-how, facilities, Apple talent (part time), everything to increase the chance of important breakthrough-success (Tim Cooks always talks about making a difference) without the heavy responsibility of an associated Apple-brand.
That might be a way to usefully employ part of the cash hoard, and Apple might want to contemplate sponsoring non-US activities with non-US capital.
Report this Comment On February 26, 2013, at 7:01 PM, TyrantBone wrote:
I know he said not to do this but....
....what would Steve do? I'm not sure he would act based on investor sentiment and it's going to be interesting to see how Tim Cook responds.
Long AAPL
Report this Comment On February 26, 2013, at 7:19 PM, durango58 wrote:
People forget that $94,000,000,000 of that cash is held overseas and a 35% tax would be due if they repatriated it. They're not going broke but a little perspective, please.
Report this Comment On February 26, 2013, at 7:24 PM, thuringensis wrote:
I hope and pray Apple will continue to ignore investors, who these days are really just traders anyway.
Instead, let's see what they can invent with the cash--the iCar? iHouse? iBot?
There's a lot left to invent--and some of it will cost a mint to create.
Report this Comment On February 26, 2013, at 7:25 PM, iseeksafestocks wrote:
I would buy KO.
Report this Comment On February 26, 2013, at 7:28 PM, mikebrinn wrote:
Mr. Einhorn is right. Sitting on that much cash does ALL shareholders a disservice. It should be put to work or returned to holders for them to employ. It's their money.
Report this Comment On February 26, 2013, at 7:52 PM, SisyphusRocks wrote:
Why was Einhorn's suit described as "frivolous?" He won. Apple lost. That is basically the definition of "non-frivolous" when a court agrees that your understanding of the law was right, and your opponent's was wrong.
Report this Comment On February 26, 2013, at 8:01 PM, lowmaple wrote:
Forget the div increase and use the extra cash WITHOUT the overseas cash to buy back shares at this ridiculously low price. The perfect buy back storm. I don't believe apple will get this opportunity again. The Fool generally holds this view of rock bottom price. There will be plenty of time to increase divs later. Buy now and reap both share price and div payments in years to come. It amazes me how quick so called investors can turn. If your not happy sell and buy lottery tickets.
Report this Comment On February 26, 2013, at 8:35 PM, JohnCLeven wrote:
iseeksafestocks might be onto something...
They should look into buying a companies that will be successful generations from now...long after AAPL itself has become obsolete.
KO, PEP, DIS, PG, GIS, NKE, V, COST, etc
They should create or buy a holding company, hire the best long term value investors that money can buy, and give them all that capital to work with. They could call it Apple Holdings and, after a few years, spin it off from AAPL, giving the shareholders the chance to decide if they want to hold onto shares of either or both entities.
What do you think?
Report this Comment On February 26, 2013, at 8:44 PM, livtwoski wrote:
As a shareholder, I worry less about the dividend(s) than I do about Apples Merges & acquisitions outlook - which seems insular.
The problem, at this juncture, (barring the dividend debate - which is far from clear) as Warren Buffet has also reflected upon for BH- once you reach a certain 'size' it becomes much much more difficult to find companies large enough to absorb. Given the culture at Apple I think it reasonable to assume this is an area that was/is neglected.
Lastly, again in the spirit of the Apple culture, I do think the company Ethos (Jobs or not) is one in which they worry about extinction via unknown forces so they think that this nest-egg mitigates some of that imagined risk.
Report this Comment On February 26, 2013, at 10:23 PM, rulesmonkey wrote:
I think Apple should buy Intel. And possibly Corning.
Report this Comment On February 26, 2013, at 11:17 PM, latam wrote:
I think AAPL should expand the TV gadget and start offering movies through itunes and take over half of AT&T and Comcast cable business combined.
Report this Comment On February 27, 2013, at 4:44 AM, Vechiger wrote:
Too much money? How about paying those who assemble a proper salary? Or, why not bring back all assembly and manufacture back to the US?
Report this Comment On February 27, 2013, at 11:30 AM, fisherxc wrote:
I looked at the most recent balance sheet and see cash way way less than the 137B you mention. Where do you get that figure?
Assets
Cash and Equivalents 16,154.00M 10,746.00M 7,945.00M 10,121.00M
Receivables 21,534.00M 18,692.00M 14,298.00M 13,769.00M
Report this Comment On March 01, 2013, at 5:25 AM, mikecart1 wrote:
The more people complain about Apple's cash pile and how it is "so big", it makes me wonder if the whole world is trying to 'spread the wealth' these days. It is sickening. Who cares if Apple has $137 billion in cash? Why do people care? It is funny when shareholders believe they deserve it as if the share price increases of the last decade aren't good enough. Unbelievable.
(BTW I own Apple and their cash pile has made me lose 0 seconds of sleep in my life)
Report this Comment On March 01, 2013, at 11:19 AM, PattyBilly wrote:
I own 3,000 shares of Apple down 80 dollars a share.
I have always believed in this company and the people who run it, but owning it has become to expensive.
What would any of you do in my place.
1. sell at market]2
2. hedge
3. b ury ones head in the sand.
Serious
Report this Comment On March 01, 2013, at 11:27 AM, PattyBilly wrote:
In a meeting this week, I learned that many people near my age (85) put all of their hopes in Apple
stock, believing it would continue to grow past the 620 pr share. I am told one elderly person refused
food until he died, another went mad over the apple situation and another elderly person lost all he had
and is now unable to keep his home.
Does the Apple board not realize what there manner of doing business is causing for older people who have been loyal for years to their company...or don't they care....I wonder and I thank God that i can quit
and maintain my life style as least until we reach
105.
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