Apple, Inc. Needs More Cash

"Opportunistic." That's how Apple (NASDAQ: AAPL  ) CEO Tim Cook characterized the decision to repurchase $14 billion in stock over the past couple weeks in an interview with The Wall Street Journal a week ago. I couldn't have put it better myself:

If you look at last year, [Apple] bought back $23 billion. But at a certain point in there [it] did a $12 billion accelerated share repurchase program, which is one of those things where you hook up with an investment bank and basically buy back a ton of stock as a one-time deal. And then the bank covers it and helps facilitate the transaction.

[...]

The point is that Apple saw that the price was low, and that was [the company] being opportunistic with this giant accelerated repurchase program.

[...]

I think that [it] could go out and do another one of these repurchase programs if [it] wanted to.

Source: Author speaking on MarketFoolery, Jan. 29, 2014.

Chances are that you think Apple has more cash than it could possibly need. In a way, you'd be absolutely right. In another way, you'd be dead wrong.

Domestic cash is king
Since Apple can only use its domestic cash for dividends and share repurchases, its stateside coffers might actually be relatively light right about now compared to its historical horde over the past couple of years. At the end of 2013, Apple's domestic cash position was $34.4 billion. The $14 billion that Apple just repurchased will take a notable chunk out of that total.

The Mac maker's domestic operating cash flow will certainly help cover the bill, but that figure is hard to quantify. Investors can look at total domestic cash flow to get an approximation. In the six quarters prior to initiating its capital return program in 2012, Apple was adding an average of $3 billion per quarter to its domestic stash.

For the past several quarters, Apple's domestic cash has been on the decline, in large part due to its aggressive share repurchase activity and dividend payouts, which totaled $7.8 billion last quarter.

History repeats itself
Last year, Apple repurchased a hefty $16 billion of its own stock in a single quarter. Of that total, $12 billion was done through an accelerated share repurchase program, with the remaining $4 billion bought in the open market. This was back when shares were trading below $450, which Apple believed was too cheap.

Much like last summer, Apple just conducted another accelerated share repurchase program to buy back $12 billion in stock, in addition to $2 billion in open market purchases.

Source: SEC filings. Calendar quarters shown.

When Apple conducted its accelerated share repurchase program last year, its domestic cash position only declined sequentially by less than $2 billion. How did Apple buy back $16 billion in stock but see such a relatively minor drop in cash? Debt.

Borrowing bills
In order to fund its repurchase program, Apple issued $17 billion in bonds last year as a cost-efficient way to tap foreign cash reserves without tapping foreign cash reserves. As hard as it is to estimate Apple's domestic operating cash flow, it's even harder to figure out how much Apple actually needs to run its U.S. business.

Still, Apple just undoubtedly spent a sizable portion of its domestic cash and it still has $18 billion left on its current share repurchase authorization. Investors won't know for sure how much domestic cash Apple has until next quarter.

Looking farther out, Tim Cook has expressed his commitment to ongoing share repurchases in the long term. Investors should not only expect Apple to boost its repurchase authorization as it approaches the current limit, but also that Apple will inevitably need to issue more debt in order to fund said buybacks. It's just a matter of when.

Apple needs more (domestic) cash.

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Read/Post Comments (16) | Recommend This Article (10)

Comments from our Foolish Readers

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  • Report this Comment On February 13, 2014, at 10:14 AM, tino1126 wrote:

    must be a slow news day for apple - that we need to insinuate that apple needs more cash, having almost 160B of cash (granted most of it it out of country) is a problem of having too much. also note that their cash hoard is growing faster than its payouts to its shareholders, to try to sell a cash problem is just a sign of having nothing to write about.

  • Report this Comment On February 13, 2014, at 12:20 PM, mds wrote:

    Hahahahaha...is all I can say.

    Cash is the only thing they don't need. Especially with most growth coming outside the US. Why repatriate cash needed for international expansion for a buy back.

    If they wanted they can buy shares under the foreign entity. Or borrow at insanely low rates that rare practically free when considering the interest as compared to the stock's gain in value.

    You are seriously sick!!!

  • Report this Comment On February 13, 2014, at 1:00 PM, mds wrote:

    AAPL made $533M so far today only on the $14B in shares recently purchased

  • Report this Comment On February 13, 2014, at 1:18 PM, TMFNewCow wrote:

    "Borrow at insanely low rates" in order to bolster domestic cash is precisely what I'm suggesting...

    -- Evan

  • Report this Comment On February 13, 2014, at 1:32 PM, aardman wrote:

    Question. If Apple buys, say for the sake of argument, Comcast or T-Mobile, can it use its overseas cash without triggering a big taxable event?

  • Report this Comment On February 13, 2014, at 5:10 PM, mds wrote:

    Buy them out; or just invest in their stock???

  • Report this Comment On February 13, 2014, at 8:27 PM, longjon123 wrote:

    I suppose you can prove Apple used domestic cash for the accelerated purchase. If not, this article is worthless.

  • Report this Comment On February 17, 2014, at 3:14 PM, The1MAGE wrote:

    The cash made overseas is subject to tax (35% I believe,) if brought to America, so it is actually cheaper for the country to borrow then it is to pay the tax to bring that cash here.

    I assume that since they are not buying the stock up overseas, that it would still end up resulting in a tax for moving that cash to America. If it was a loophole, many companies would use that option.

  • Report this Comment On February 17, 2014, at 5:40 PM, bookz wrote:

    Is it possible to use overseas cash to buy-back shares of apple traded on overseas exchanges?

  • Report this Comment On February 17, 2014, at 6:08 PM, porschetech wrote:

    Even if a stock is traded on other exchanges it does not mean it is held there. In basic no you cannot.

  • Report this Comment On February 17, 2014, at 6:09 PM, porschetech wrote:

    Even if a stock is traded on other exchanges it does not mean it is held there. In basic no you cannot.

  • Report this Comment On February 17, 2014, at 6:13 PM, cooter1127 wrote:

    Interesting article, Can someone help clarify one thing for me as my international corporate tax knowledge isn't that good:

    Can the bonds issued to finance the share repurchasing be repaid from the international coffers without generating the same tax liability that using the international money directly for share buybacks would create? Or is Apple just delaying an inevitable tax bill that they will have to pay in the future?

    It seems to me that if Apple can repatriate some of their cash hoard at the cost of today' s interest rates this would be a non issue as they basically have unlimited access to their cash at a much cheaper rate than they would be paying the government. But if they are kicking the tax bill down the road and paying interest to do so I agree that it is a little troubling.

  • Report this Comment On February 17, 2014, at 10:10 PM, thunderboltnova wrote:

    Apple is the safest stock there is folks! 100% there is not a bubble here. I bet the farm on Friday, literally backed up the truck. Here comes $1,000 share soon and eventually $100,000 share.

  • Report this Comment On February 17, 2014, at 10:55 PM, glassbd86 wrote:

    Maybe I can shed some light on this:

    Rumor on the west coast is that Apple's foreign cash sits in Luxembourg at roughly 3% ETR, so when you factor in state taxes (assuming Apple has a high CA apportionment factor) repatriation costs can run up to about 36%. So, for that $100B in cash, factor in a $36B tax hit - which is not chump change, even for Apple.

    @mds - You can't have foreign entities do the stock buyback. You run into three potential tax traps, which is akin to repatriating the money directly. The first is the investment in US property rules under IRC sec. 956, which treats the stock purchase as a deemed dividend (i.e. repatriating). The second issue is potentially creating hook stock, which is an enormous pain in the butt. The third issue is potentially running afoul of the anti-inversion rules, which would essentially serve to tax Apple in Luxembourg by the US.

    @cooter1127 - Essentially, no, you can't issue the bonds from overseas. You're back under sec. 956 again with this sort of transaction. HP tried a series of short term loans that served to loan the US cash every month a couple years ago, and it got them dragged before Congress, even though it technically got them out of sec. 956.

    @longjon123 - I can assure you, they did.

  • Report this Comment On February 18, 2014, at 9:45 AM, partythenwork wrote:

    for the guy who said apple will be $100,000 per share is seriously silly. at $1,000, Apple's market cap is at $1 trillion, and if it got to $100,000 per share then the market cap of Apple is at $100 trillion which is greater than the entire market cap of all of the stocks and bonds in the world combined. The only thing that has greater value than that is the currency swap market ($350 trillion) and other derivatives ($500 trillion).

    the reason why Apple is now struggling in terms of moving the stock needle higher is that there isn't enough money out there to move it up further. At $1 trillion in market cap, Apple's market cap would be more than 5% of the entire S&P500 market cap.

  • Report this Comment On February 21, 2014, at 2:37 PM, wlweldy wrote:

    Ridiculous article- If they need more cash, bring back overseas money, pay the 35% tax and you add another $100billion to domestic cash. What other company has this much cash? Maybe the article could have been better titled - All American companies need more cash!! It seems to be a great sport picking on APPl, but this is the first time I've heard this one???

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