Thursday, August 5, 2010

Apple Cash and Marketable Securities to be valued at more than 50 Billion by September Quarter


Ben

Look I confess to being an Apple fanboy.  I buy their products and I own the stock.  That does not meant that all is well in my nearly one way relationship with the company....

46 Billion Dollars.

Warning Full on RANT. Chart Link Asymco

I will state my proxy for future voting that Apple is not acting in the best interest of shareholders in regards to retained earnings policy.

46 Billion dollars.

A company, any company, on principal should keep enough cash on hand to support its operations capital investment need in order to fulfill its corporate mission.  That mission is ultimately to provide return to shareholders.  Outsized retained earnings provide a disinsentive to management to performf

Cash provides no return (or hideously little and in either case far less than presumably the firm is designed to earn in its core business) gives management incentives to invest in things outside the core competencies of the company, Makes the firm a takeover target (not likely here) and has a miniscule effect on the value of the firm (a dollar is worth a dollar A dollar of a firms earnings are worth many times that).

Notice in the chart Cash and short term marketable securities have been flat to declining since Q4 2008 virtually all of Apples surplus capital has been invested in long term marketable securities.  This is evidence that Apple knows they have nearly no use for this cash since even though they are marketable they would take a significant loss if interest rates were to rise.  

Apple have rendered illiquid 21 billion in cash by investing in long dated securities. In the 9 months of this fiscal year Apple has generated 11.9 Billion in cash. Of that 92% 11 Billion was invested in long term (maturing in more than a year) securities (Corporates, Treasuries, Munis?). As a conservative trustee of shareholder assets Apple will hold these securities to maturity. Effectively Apple is saying they have no use for 21 billion dollars in the next ~2+ years...(it could be 10 we do not know the maturity dates of the securities they are acquiring)

Apple should return to shareholders cash it does not have a reasonable expectation of needing for operations Or capital investment into other businesses. 

When you price a stock you subtract the cash from the market cap before you do your multiple of earnings calculation.  We don't usually take the time because the "Net Cash" after liabilities a company has is often too small to matter.  In round numbers Apples cash horde is 20% of the current market cap.  meaning that Apple is effectively trading a an approximate P/E of 13.5.

46 Billion Dollars

OK so you say Apple needs money for investing in Product iX the next magical and revolutionary device to be announced.   Since 2006 Apple has more than doubled its cash position while investing in development of a dozen new computers, 4 iPhones, iPad, half a dozen iPods and a semi mythical data center in North Carolina. 

You know what is bigger than 46 Billion? ...  51 Billion.  That is what they are likely to report in Q4

Apple should pay a dividend or repurchase shares
A reasonable divident pay rate is 50% meaning that ~50% of Net Income is paid out in dividends. Based on my back of the envelope calculations fiscal 2010 earnings will be ~$15 per share indicating a $7.50 per share dividend (~3% Yield). If Apple did this on a go forward basis they would still have 50 Billion in cash before the end of 2010 and continuing to accrue cash at well over 500 Million a month.

According to S&P the longer term average cash position (which unfortunately omits debt) held by the Fortune 500 is 6.6% (Currently 10%) of their market cap. Apples cash position is roughly triple that. And to repeat... Apple has no debt, ZERO.
So lets say Apple used the current market as a gauge for prudent cash management and planned on having 25 billion (10% of market cap) on hand. This would make 21 billion dollars or 22.65 per share available to distribute to shareholders.

Non-financial companies in the S&P 500 index reported $837 billion in cash at end of March Apple by itself represents 5.5% of all cash held by the fortune 500.

With the use of leverage There is not a single US corporation that Apple could not buy, so here is the question for Apple shareholders. What company valued at greater than 20 Billion dollars could Apple buy with their cash horde that investors would see as positive news to investors?  HINT...  Apple has never purchased a large company and is very unlikely to  buy any of the media companies or Google for regulatory reasons. ......Anyone? ..... Anyone? ....Bueller?.

Analysts... Et Tu?

None not one of the analysts covering Apple asked about their cash position in the last call. I suspect for a couple of reasons. 1 they do not own the stock. 2, they are interested in the stock price and where is its going and the cash position as I mentioned earlier is de-minimus. and 3. They curry favor with Apple.

You want to follow their advise?

The truth is that the only reason Apple has for keeping any cash outside of what it a needs for Cap X, and operations is that they can.... It  protects management from future mistakes.  Why would Apple give up the cash if investors are not effectively asking for it..  Abetter question from my perspective is Why should investors want to subsidize managements insurance?

Ok so 46 Billion is a big number and hard to get your brain around here is a list of things that are46 billion dollars.

There are only three individuals in the world worth more... (Gates, Slim, Buffet)
Total dollar value of Electronics exports from State of California in 2008 $48b

Foreign currency reserves Argentina 2008 $46.6b
N.J. Pension Deficit $46 b
Smart Grid Spending Forecast by 2015: $46 b
Massachusetts State Pension Fund $41.3 b
Just for fun...
Major League Baseball gross revenue 2009 $6.6b


Other links
Fortune on the Sustainability of US Corporate Cash Positions
Asymco Cash analysis



Author is long Apple and would like current yield from his investment in Apple



5 comments:

BladRnr said...

But...but...but. You ignore the value of the stock that has profited owners way more than a 3% dividend. Buy Apple and watch the stock return 25%-50% in the next two years. It's painfully obvious Apple knows what they are doing. They own the tech market in terms of future growth. Three percent for stock owners is nothing in terms of the stock's growth potential.

Also, consider the shaky ground the US federal government has built their house of cards on. It is not unreasonable to think hyperinflation is right around the corner. You don't think Apple is smart enough to want to brace themselves for that reality? This isn't the '60s where it's business as usual. The feds are printing money, spending money, and borrowing money like it's paper. Because in reality it is. Just. Paper.

Take your Apple stock and buy gold. Real gold. As in coins, and bury them in your back yard. Kind of like what Apple is doing.

Unknown said...

I just wish they could do something with that money to stop the shares from being so damn volatile. I can't believe a company with so much cash and product demand can stay so weak and vulnerable to media rumors. What the heck does this company have to do to gain upward share price momentum. I only wish they could spend that money on buying some company that will stabilize them. Maybe they should build their own factory in order to keep up with product demand.

I'm sure that Apple knows what it is doing with the reserve cash and I don't blame Apple for the slow share price rise, but surely Apple must find some way to prove it's worth its current value. Apple just had a blowout quarter and yet the share value still dropped. How sick is that?

Anonymous said...

It sounds like you're downright pissed at Apple for making you so much richer over the past several years ;-)

As much as you are unhappy with the huge gains Apple has made for investors like yourself, in addition you want Apple to cash-in it's war chest so that you can "take the money and run".

It should be apparent to you from Apple's many successes that company management actually know what they are doing (as opposed to many other companies in the tech sector).

It's well known that Apple works from long-range plans of 5 years, ten years, or more. So, it's no mystery that they need to plan financially for future projects (not just the ones you see today).

You might think that a product like the iPad just goes from the drawing board to sales in a year, but in reality it takes many years of investment, research, and development.

And for the record, Apple's data center in NC is not "semi mythical". It does exist, and Apple is putting billions of dollars into this project. Just because Steve Jobs may not have filled you in personally on what the long-range plan entails, doesn't mean that nothing is happening. There are videos on YouTube showing the building and property, and just how huge this project is.

As an investor in Apple, you should be happy with the incredible success the company has made and the massive returns you have received on your investment, rather than wanting to "kill the golden goose".

Unknown said...

I can't believe the sentiment behind this post ie. I gave Apple some of my money, so they should give me back some in dividends because they have a big war-chest!
Short-sighted or what... or maybe arguing to short Apple.
Take a look at Apple's share value over the last 8 years.
Its up, up, up then down. Then up, up, up then down. The trend is up with short selling drops almost on queue with earnings reports. Take the long view and rejoice or take your winnings and go for safety with dividends - usually linked to a company treading water with a good revenue stream but going nowhere.
Me, I bought modestly in 02 against the advice of friends, family and the broker I used and now look like some sort of super investor with a 7 figure return even after cashing some in 2 years ago. I used the splits to purchase more and have never wanted to stir a pot which is over flowing.

BnVested said...

Thankyou for your input. I would have you all own the stock of the company I run...

paying a dividend purchasing back their stock, or giving stock dividends all would have the same net imact. More returns for the holders of the stock.

I do not argue the significant capital appreciation I have received, nor do I argue that a cash dividend pales in comparison. I am saying that retaining excesive earnings truncates the upside shareholders have earned only to the benefit of management.

Thanks for the feedback