

Apple’s cash pile - The tech giant should give cash back to shareholders - dazbradbury
http://www.economist.com/node/21549978

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mynegation
Paying dividends is a bad signal. That did not work well for Microsoft's share
price. And even though OP argues that Apple will not repeat their fate, the
argument is weak. There is only so much more iStuff that you could sell when
everyone and their mother has an iPhone.

Paying dividends essentially signals that company does not see how to spend
money and has no long-term strategy for growth.

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tpurves
Actually this not reflected in the empirical data. Studies of the data
comparing longrun performance of companies with high payout to low payout
ratios show significantly that average companies* perform better when they
retain less cash.

This is counter-intuitive because a strategist would tell you that companies
with more cash have more options, companies with less cash have to go through
all the expense of going back to the market every time they need to make
capital investments.

One thing that turns out to be the factor is agency costs. Companies with
large cash hoards might waste money on bad or frivolous projects or more often
bad, overpriced acquisitions.

In apple's case they have more cash than they can reinvest in their own
business. The market could get better returns on that cash than apple can.
Therefore the market will value the cash on Apple's books at discount to it's
true value. The cash is discounted by apple's low sub-market rate of return on
that capital and by the implicit risk that management might any day choose to
do something dumb with it.

Instead companies that have to go to the market more often to raise cash, that
have to file more prospectuses, turn out to be more transparently run and more
accountable to shareholders. In the long run managers who "have to open the
kimono" more often, turn out to perform better for shareholders.

When Microsoft announced the first huge one time dividend in 2003 or whenever
it was, something funny happened. When they transferred X billion dollars to
shareholders, their stock should also have dropped by exactly X billion
dollars reflecting the value transferred out of the company. Instead their
market cap only declined by 0.8X. Meaning than hundreds of millions of dollars
of shareholder value was created out of nowhere. This was because the cash was
worth that much more to shareholders who had a use for it than in the of
microsoft who couldn't do anything with useful with it.

The 0.2X was the implicit discount of the value of that cash on MSFT's books
that was unlocked by setting it free.

In fact because dividends are hard to take back, a dividend usual signals to
the market that management have confidence in future earnings growth. Stocks
usually jump on dividend announcements even though theoretically it shouldn't
make a difference. That's the signalling effect.

*the big caveat being that APPL famously never performs or does anything exactly like an average company.

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Skroob
My problem with this, and all other stories on the same theme, is "Why?" Why
does Apple NEED to do anything with its cash reserves?

The story says: "Last month Mr Cook admitted that the firm has more cash than
it needs for its operations. It’s a nice problem to have. The obvious solution
would be to give cash back to shareholders, either via dividends or share
buybacks." They claim having more cash than they need as a problem, and then
spend 5 paragraphs detailing solutions, without further explaining WHY it's a
problem.

Speaking as an (extremely minor) shareholder, I have no desire for dividends
or anything else. My AAPL portfolio has gained 100% in 2 years, that's good
enough for me.

~~~
jcampbell1
I am also an apple investor. If they have $50B of cash they have no use for,
then they are forcing me to be invested in government bonds. I'd rather have
the money myself, and invest it in something that gets better than a .5%
annual return. Using the dividend to buy more Apple stock would be better than
the current situation.

~~~
masklinn
> If they have $50B of cash they have no use for

Not the case and not what was stated.

They don't need those for immediate ops right now, but having tens of billions
readily available is a great chip when discussing deal with manufacturers. It
means you're able to put billions on the table upfront at a financial moment's
notice. Apple's billions in the bank are a major asset in their negotiations.

~~~
jcampbell1
We can bicker about the amount, but the meaning of "more than we need to run
the company", means there is some that is of no use to the company.

I perfectly agree that Apple should keep a massive cash horde to fund future
investment.

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brudgers
I'll say it again. Apple should buy Disney because they can provide Apple with
gold plated content, it would actually be a halo brand for Apple, and their
worldwide brands are highly compatible.

When Apple had $30 billion and Jobs was alive, it was possible for Apple to
take control. Today they could buy all of it at a premium and still have $10
billion left over.

~~~
RexRollman
So you want them to be like Sony, who has gone down the drain since purchasing
entertainment businesses? I would prefer Apple to continue doing what they do.

~~~
brudgers
Sony is an interesting comparison. But they haven't had an iconic product
associated with their brand since the BetaMax, and I don't think anyone could
differentiate their content from Fox in the way that Disney's content is
readily identifiable.

I.e. name three specific Apple products and three Disney movies - now try that
with Sony electronics and movies.

~~~
RexRollman
What about the Walkman or Playstation?

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joshu
Actually, this is easy: If Apple thinks the NPV of holding the money is
greater than the NPV of not holding it, then they should do so.

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stevengg
I see a lot of posts like this one talking about how apple NEEDS to do
something to lower its stockpile of money but none of them seem to explain
why. could someone tell me why holding $100 billion in cash is worse then
doing stock buy backs and or issuing dividends if the market takes into
consideration its large cash reserves when pricing its stock.

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jballanc
Just to give some perspective on how much money Apple has, they almost have
enough to re-build the US Interstate Highway system
([http://en.wikipedia.org/wiki/List_of_world%27s_most_expensiv...](http://en.wikipedia.org/wiki/List_of_world%27s_most_expensive_transport_infrastructure))
or construct their own space station
(<http://historical.whatitcosts.com/facts-space-station.htm>)...

The article hits on a key point, though. Consider that during Jobs life he saw
giants like AT&T and IBM falter, and other giants like Microsoft rise from
nothing, and then falter. He used to tell a story about how they were 1 week
from defaulting on payroll when he returned in 1997. I think he certainly
wanted to keep the money for a "rainy day" scenario.

Which brings me to the most interesting thing that Apple could purchase: they
could afford to pay an average salary of $300,000/yr to _every one_ of their
employees for _5 years_ with absolutely no revenue, and they still wouldn't
exhaust their bank vault. If it were up to me, I would say they should start
something equivalent to Bell Labs or PARC, but they won't. To do so would be
antithetical to the very character of the company. In other words, quite the
bind to be in...

~~~
gwright
Apple is a publically held company. Disposing of profits by giving it all to
employees would be a wonderful way to create an instant shareholder lawsuit.

The cash held by Apple is built in to its share price. If a stock holder wants
some of that all they have to do is sell some shares. Undoubtably there are
some tax considerations regarding capital gains vs. dividends but the fact
remains that if Apple distributed a significant amount of its cash to
shareholders, then the share price would inevitably drop by the same amount.

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protomyth
First, quite a lot of the money is overseas and at the current tax rate isn't
coming home.

At this point, I would favor acquisitions over cash to shareholders. Although,
being cautious in this economy is probably a good thing.

