Apple's (NASDAQ:AAPL) balance sheet is something to behold. Thanks largely to the iPhone, Apple has accumulated $218 billion worth of cash, cash equivalents, and marketable securities. To put that in perspective, the world's largest hedge fund, Bridgewater Associates, has a mere $169 billion worth of assets under management.
This adds complexity to Apple. In addition to developing and improving products, expanding market share in existing markets, and tapping into new markets, the California-based company must also manage what may very well be the largest accumulation of retained profits in the world. It does so principally by investing in corporate and government securities, as you can see in the chart below.
A majority of Apple's investable assets are allocated to corporate securities, which accounted for 58% of its cash, cash equivalents, and marketable securities at the end of its latest quarter. U.S. government securities make up the second largest category, at 21%, split between Treasury and so-called agency securities -- that is, mortgage-backed securities insured by Fannie Mae and/or Freddy Mac. And cash and a variety of other investments lay claim to the rest.
While the large amount of corporate securities makes it seem like Apple takes on substantial credit risk with its investment portfolio, the company is clear in its regulatory filings that it's selective when it comes to making investments. As it notes in its latest 10-Q (emphasis added):
The company typically invests in highly rated securities, and its investment policy generally limits the amount of credit exposure to any one issuer. The policy generally requires investments to be investment grade, with the primary objective of minimizing the potential risk of principal loss.
The italicized portion is reminiscent in particular of Warren Buffett's maxim about the two most important rules of investing:
Rule No 1: Never lose money.
Rule No. 2: Never forget rule No. 1.
Apple's relatively conservative stance is supported by the small fluctuations from one quarter to the next in the value of its holdings. At the end of last year, for instance, there was only a $2.3 billion difference between the adjusted cost of Apple's positions and their fair market value. That may seem like a lot in absolute terms -- we are, after all, talking about billions of dollars -- but it amounts to a mere 1% change in the portfolio's value.
This is good news for shareholders. The size of Apple's cash and investment portfolio insulates it from negative economic shocks which could bring less prepared companies down. This is particularly important given the ongoing economic issues in China, Apple's second largest market after the United States.
It's also good news because it means that Apple's massive capital hoard is being carefully preserved for future distribution to shareholders. This leaves it substantial room to grow its dividend and buttress its already considerable share buyback program in the quarters and years ahead.