Apple (NASDAQ:AAPL) is sitting on a massive pile of cash and investments. Cupertino's total cash reserves currently add up to $193 billion, up from $155 billion just six months ago. Balanced against just $40 billion in long-term debt, that's a net positive balance of $153 billion. That's roughly the gross domestic product of Hungary!
That reserve goes far beyond saving some cash for a rainy day.
Beyond collecting $512 million in net interest in the second quarter, most of that spare cash isn't doing Apple and its investors any good. But you didn't come here to see us complaining about Apple's stale cash piles. You wanted to hear how the company could put that money to good use right now.
So we asked a panel of Motley Fool contributors to list their favorite ideas on how Apple should spend some of that cash. Here's what they came up with. (Spoiler alert: Nobody wanted Apple to explore big-ticket acquisitions!)
Sean Williams: Higher wages.
I'd suggest the smartest move Apple can make is to boost wages for its employees across the board.
A CareerBuilder study in 2013 noted that 70% of respondents believed that higher pay would be critical to improving employee retention. This followed, per the report, a third of the respondents in the study affirming that top talent had left their business in 2012. Higher pay for Apple employees would serve to keep top talent within the company, as well as improve morale throughout the ranks -- all the way down to its Apple stores, which provide a one-on-one engagement experience between the consumer and the brand.
The last publicly announced pay raise for Apple's domestic retail workforce -- which stands 30,000 people strong across 265 stores, per Apple's latest data -- was three years ago. Over those three years, Apple has generated nearly $136 billion in free cash flow, leaving plenty of room to substantially boost wages. This way, the company can keep workers that have direct interaction with Apple's loyal and new customers excited about the brand.
Higher wages could also be instrumental in ensuring that top design talent doesn't leave the company. Although talent leaves for a variety of reasons (i.e., it's not just about the money), iOS designer Greg Christie left last year after nearly 20 years with the company, and former VP of Retail Jerry McDougal resigned in 2013.
Though this is just a snippet of what's going on behind the scenes at Apple, higher wages would encourage the cogs that have driven Apple's iOS and platform success to remain in place. Hopefully this would lead to continued growth in Apple's bottom line and cash flow.
Andres Cardenal: Buybacks.
Apple is not only sitting on a gigantic cash hoard on its balance sheet, but the business also generates tons of money on a recurrent basis. So Apple has enormous financial firepower to reward shareholders with dividends and buybacks.
Operating cash flow during the six-month period ended on March 28 was $52.8 billion, a 46% increase versus the same period in the prior year. Capital expenditures absorbed only $5.6 billion of that money, so free cash flow in the first two quarters of fiscal 2015 was $47.2 billion, a 44% year-over-year increase.
Apple recently announced an 11% dividend increase for 2015, and management got authorization from the board to increase the stock buyback program from $90 billion to $140 billion, while extending it through March 2017. Including both dividends and buybacks, the size of Apple's capital return program increased more than 50%, from approximately $130 billion to $200 billion.
The company is putting buybacks above dividends when it comes to returning cash to shareholders, and this is the smart thing to do, considering that the stock is attractively valued. Apple stock trades for around 14 times projected earnings for the current fiscal year. That's a discount versus the average valuation for companies in the S&P 500 index, which is roughly 18 times forward earnings.
At these prices, repurchasing stock looks like a great use for Apple's massive cash resources.
Anders Bylund: More R&D.
In the technology sector, innovation is the very lifeblood of lasting success. Apple could dip far deeper into that life-giving well, and it's really the only way to stay relevant for decades to come.
Don't get me wrong -- Apple certainly spends big money on R&D. In the recently reported second quarter, that budget rose 34% year over year to land at $1.9 billion. The company deserves kudos for growing this crucial line, and at a faster pace than revenue.
But I'm still not impressed, because Apple could do so much more.
Those R&D dollars amount to just 3.3% of Apple's net sales. Did you know that Microsoft spends nearly 13% of its revenue on fresh product development?
Even better, Google keeps that innovation metric at a lofty 15%. So does Tesla Motors. Google and Tesla aren't looking for short-term profits -- they want to change the world. If that means sending people to Mars by 2030, halting human aging, or putting your steering wheel in computerized hands, then so be it. They've got the assets to invest, and ambitions to match. Apple is missing one of those elements, and for no good reason.
In its quarterly SEC filings, Apple says that its R&D strategy is all about restraint. "Focused investments in R&D are critical to its future growth and competitive position in the marketplace and are directly related to timely development of new and enhanced products that are central to the Company's core business strategy," according to the company's most recent 10-Q filing.
Fair enough, and Apple wrings plenty of success out of this formula nowadays. But how long will it last?
This restrained approach saddles Apple with a limited product portfolio that won't stand up to the next dramatic market shift. Cupertino could move beyond handsome electronics to become a hotbed of game-changing innovation. Triple that R&D budget, and Tim Cook would still have plenty of cash left over to explore other asset management ideas.
Tim Beyers: Expand retail stores.
Apple had 453 retail locations worldwide as of March 28. While that's up from 423 stores in last year's spring quarter, it's a relatively tiny network for such a large operation. Retail accounted for $5.2 billion in revenue in last year's second quarter, or $29.1 million in average revenue per store.
Apple didn't report that metric in this year's fiscal Q2 filing with the SEC, but it seems fair to conclude the number hasn't declined much -- if at all.
And if it has, the fault may lie as much with how the stores utilize space as anything else. Apple is notorious for creating wide aisles, open displays, and allowing plenty of room for Genius Bars to care for customers with support questions.
But there's no rule that says Apple has to keep doing retail the way it always has. The company that "thinks differently" could reinvent its space to include more formal business training and support to cater to the growing number of small and medium-sized businesses that now run on Macs, iPhones, and iPads. Local merchants might respond to the beefier services by signing rich, long-term contracts, boosting Apple's retail revenue.
With $33 billion in cash and short-term securities, Apple needs something to invest in. Adding new stores offering expanded services is as good an option as any, and may offer the best shot at meaningful long-term returns.