Apple (NASDAQ:AAPL) revealed last week that it's setting up a Nevada subsidiary dubbed Braeburn Capital to manage its $8.5 billion-plus cash hoard. By incorporating the entity in Nevada, Apple avoids the state corporate income tax and capital gains tax it would have to pay in California. In addition, Nevada doesn't share its data with the IRS, though I don't think that's a major factor. In my opinion, saving money on the corporate and capital gains taxes is a smart idea.
The larger question is what Apple will do with a cash hoard that should grow even quicker with a team focused on managing it. The standard options for returning value to shareholders are to reinvest in the business, pay out dividends, repurchase shares, or pursue acquisitions. Let's take a look at each of these, because each has the potential to benefit shareholders to a varying degree.
Acquisitions
I have a hard time envisioning Apple acquiring anything but small businesses. Apple appears to have its own way of doing things, and absorbing a large company with a different culture would likely prove painful and difficult. I don't think investors should expect Apple to make anything but targeted acquisitions that add knowledge and skill sets that the company doesn't already have internally.
Share repurchases
Share repurchases could make a lot of sense for Apple at some point, but at the moment, I'm inclined to think that large share repurchases aren't likely as the shares are reasonably valued. At the right price, share repurchases could add value to shareholders to the extent that they exceed the company's dilution via stock options. Reinvesting cash in Apple's business or paying a special dividend appears to make much more sense.
Dividends
Given that Apple has such a large cash hoard and that it earned more than $2 billion in free cash flow in its last fiscal year, initiating a dividend appears to make sense on the surface. Look a few years back, however, and you see that the company was free cash flow-negative in 2001 and 2002 and generated only a little more than $100 million in free cash flow in 2003. On a free cash flow basis, the past 18 months have been Apple's most profitable ever, with the last strongly profitable years coming in 1998, 1999, and 2000. So while Apple generates plenty of cash now, a dividend doesn't appear to make a lot of sense. The iPod business could slow down or slowly erode because of competition from Verizon (NYSE:VZ) and others. A special one-time dividend would appear to be a sensible idea, though, given the current cash hoard and cash generation.
Microsoft (NASDAQ:MSFT), Oracle (NASDAQ:ORCL), and a number of other tech and non-tech companies have substantial cash hoards. In many cases for tech companies, these cash hoards are rainy-day funds for periods when sales are soft; maintaining new product development during such times until demand returns is considered critical. Historically, that is probably the most accurate way to describe Apple's cash hoard.
According to the definition on wikipedia.org, a braeburn apple is sweet and tart. I have my doubts about Apple's motivations toward shareholders with setting up Braeburn Capital, and I'm skeptical about a company like Apple getting into the capital management business. That said, I hope that the returns Braeburn Capital earns are of the sweet variety -- providing long-term gains to shareholders -- instead of the tart kind that you end up spitting out.
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Nathan Parmelee owns shares in Microsoft but has no financial interest in any of the other companies mentioned. The Motley Fool has an ironclad disclosure policy.
