Good for You, Apple

While many view Carl Icahn's involvement in Apple (NASDAQ: AAPL  ) as one of the chief reasons that the shares have recovered from the low-to-mid-$400s, many other longer-term investors aren't too happy with how Mr. Icahn has attempted to -- for lack of a better term -- bully Apple around. Yes, investors understand that Apple has a pretty hefty amount of cash on its balance sheet, and yes, many want to see this put more directly into the hands of investors, but Apple is really doing the right thing for its long-term future.

Lots of cash means opportunities if things go south
Apple is no stranger to difficult times, and it seems quite plain that the late Steve Jobs and his successor, Tim Cook, truly understand this. While times are great today with the iPhone, iPad, and even the Mac line of products humming along and generating robust profitability for the company, the risk is always there. What if Apple slips up on an iPhone/iPad release, or what if Samsung (NASDAQOTH: SSNLF  ) -- frankly, a behemoth with cost-structure advantages over Apple -- manages to market its way to eroding Apple's profits? Or what if something unforeseen happens that essentially sucks the profit out of the smartphone/tablet businesses?

This is the paranoia that likely keeps Cook and the rest of the management team up at night, and it's why Apple keeps just south of $150 billion in the bank. Some may think that this amount -- or that paranoia -- is excessive. Some may complain that having that much cash on the balance sheet dings some financial metrics, such as return on equity. But Apple needs to tune out the critics and do what it feels is right for the long-term viability and safety of the business.

Consider this doomsday scenario
Let's suppose that Apple goes ahead and issues a ton of debt -- we're talking $100 billion or more in order to implement Icahn's call for a $150 billion buyback. Let's also suppose that Apple does so at $560 per share. Upon the announcement of such a buyback, Apple's shares would probably begin to rise, perhaps to $600 and beyond. As Apple keeps buying back shares, it ends up with a massive debt load.

Then, imagine that Apple's business falls under hard times. The buyback is exhausted, and free cash flow is under pressure. Apple can't introduce any further artificial buying pressure to the stock. The shares begin to fall rapidly -- perhaps back into the $300s, or even lower since there is no more net-cash cushion. Suddenly, Apple has a bunch of debt that it used to buy back stock at much higher prices, and, thanks to that debt load, it doesn't have the financial wherewithal to complete a key acquisition or invest in an off-the-wall, save-the-company initiative. Wouldn't it have been better for long-term investors for Apple to have kept that cash pile?

This is probably why Tim Cook and the board don't want to do what short-term speculator/investor Icahn is calling for. They know that a big, fat, cash war chest doesn't really hurt and can be exceptionally useful in a pinch. Management is doing the right thing here.

Investors can always sell
Apple has been one of the best growth stories in the history of technology, if not the best. The company went through some pretty hard times and ate a lot of dirt before the success of the iPod, iPhone, and so on. Apple doesn't want to be there again. It wants to have plenty of cash to cushion it if the business goes south and it needs to reinvent itself again.

No other company in the world can really offer that sense of security to its investors and, frankly, Apple shareholders should be happy that the company cares more about its long-term prosperity and safety than giving the stock price a short-term shot in the arm. If investors don't like how Apple allocates capital, they can sell their shares.

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  • Report this Comment On December 30, 2013, at 2:28 PM, twolf2919 wrote:

    The author's very first statement is an opinion not a fact. Tell us, pre tell who are the "many" who view Icahn's involvement as one of the chief reasons for AAPLs stock recovery? I say, Icahn had no major role at all! Icahn, like many shrewd investors simply got in while the stock began to turn around. If his self-serving blathering (his typical pump-and-dump) had any impact, it was minor.

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