Apple's Cash Conundrum

Why does Apple (NASDAQ: AAPL  )  have so much cash? The practical answer is simply that Apple generates a lot of it. In the latest quarter, the company generated $22.7 billion in cash from operating activities. Even though that's down from the same quarter a year ago, it's representative of the norm. The company also made $38 billion from maturing securities and the sale of securities in the latest quarter.

Despite lower operating income, Apple's total cash actually increased roughly $12 billion from Q4 last year to Q1 this year, compared to an average net cash increase of $9.4 billion per quarter over the last three fiscal years. That's very impressive, especially considering the company is in the middle of an historic stock repurchase plan, and a 15% dividend increase.

The abstract answer is that it's hard to tell why Apple is holding on to so much cash. According to the latest 10-Q filing, Apple believes its cash holdings are sufficient to sustain operations through the current year. As a reference, last year's operating expenses combined with income tax provisions total $28.4 billion. That number leaves considerable flexibility for the company to operate for an entire year without revenue since it currently holds $158 billion in cash.

Some have pointed out that it is hard to tell how much it costs to run Apple's U.S. operations, and that most of Apple's cash is located overseas. In its latest reporting, roughly 78% of the company's total cash is overseas. To repatriate that money, it would be taxed at the U.S. rate of 35%, and due to that obstacle, Apple has decided its non-domestic cash will remain overseas indefinitely. Many companies with large cash holdings are in the same situation, with growing cash balances stuck in foreign accounts.

What is Apple doing with all that cash?
Apple is currently authorized to buy back $60 billion of its stock by the end of 2015, and has increased its dividend to $3.05 per share. Besides that, the company is investing in more cash equivalents and marketable securities, so its cash continues to grow.

Increasing the dividend is a nice bonus for shareholders, but repurchasing shares only rewards those looking to exit or reduce their ownership in the company. Since Apple can only use domestic cash for these payouts, the situation isn't likely to change much, as long as the majority of the company's cash is overseas. Tapping domestic cash reserves to appease investors could end up hurting in the long run.

A decade ago, Microsoft (NASDAQ: MSFT  ) was in a similar cash situation and began a similar payout plan with stock repurchasing and dividend hikes, like Apple is doing now. Ten years and $220 billion later, Microsoft still has more cash than it did when it began those payouts.

Apple's continued cash growth, despite large payouts, points to the same likely outcome. As the economy continues to improve, it makes less sense to focus on increasing cash reserves. Cash needs to be spent in ways that advance the company and its products. Apple is making that more difficult by reducing the ratio of domestic to foreign cash.

Have we seen the best of Apple?
The current trend of buying U.S. government securities and waiting for them to mature is too cautious for a company with Apple's potential. Its brand was built by being innovative and shaking up the way we interact with software and hardware.

A lot of people believe that Apple's stock is cheap at around 13 times earnings, and they may be right. However, that's only cheap if Apple has significant growth ahead. Microsoft is also trading close to 13 times earnings, but its stock has only grown around 5% per year for the last 10 years. For comparison, Google is trading at 33 times earnings, which is more characteristic of expected growth.

There are rumors of acquisitions that Apple may be considering, as well as new product categories. If realized, these would be good indicators that the company will most likely remain a leader for the foreseeable future. However, Apple is currently sitting at a crossroads where the continued misapplication of its cash resources could be the difference between continued greatness and mediocrity.

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Comments from our Foolish Readers

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  • Report this Comment On February 26, 2014, at 3:41 AM, singaporenick wrote:

    Nothing new in this article.We've read all this before.

  • Report this Comment On February 26, 2014, at 7:19 AM, iphonerulez wrote:

    I'd sure like to know why all that cash is weighing down Apple's share price like a boat anchor. Tim Cook should lighten the load by buying Tesla.

    I don't quite understand why Apple doesn't use that overseas cash and invest it in some projects overseas. It'll make the cash grow faster and then if there's an emergency, Apple can move some over to the U.S. even if it does have to take a tax hit.

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