What would you do with $100bn?
It’s a nice problem to have, but one which is becoming increasingly pressing for Apple, which this week announced that its spare cash was now grazing this total.
Apple is throwing off so much cash because it is growing so fast. Sales of iPhones and iPads more than doubled in the last three months of 2011 compared with a year earlier, resulting in record net profits of $13bn.
Bloggers and others vied with one another in hyperbole to describe what $100bn represented – enough to pay Greece’s debt service for the next two years, or to buy Facebook – but sitting on so much cash is a mixed blessing for Apple and its shareholders.
Actually managing such a sum is in itself a challenge. Two-thirds of the cash is held overseas, and must be spent overseas, because repatriating it to the US would trigger a large tax bill.
Yet Apple is unlikely to make a big acquisition. It has tended instead to buy up (or take a stake in) small companies that provide it with important technology – such as Siri, which supplies the voice-powered personal assistant on the iPhone 4S. And it spends substantial sums pre-paying key suppliers. Neither, though, will make much of a dent in its reserves.
The cash also mucks up calculations of the “true” value of Apple shares. It represents about $104 a share – nearly a quarter of Apple’s $445 share price. This presents a dilemma for analysts. Do you subtract the cash, on the assumption that it is not part of the business? Once you do so, the shares are worth about 10 times trailing earnings, a pretty low valuation for such a fast-growing and highly profitable company.
So reducing the cash might – somewhat bizarrely – result in a upwards revaluation of Apple’s shares. Similarly, paying a dividend could also do so by attracting new investors – analysts point out that many mutual funds are barred from holding stocks that don’t pay one.
Apple has never paid a dividend, arguing that shareholders benefited more from it investing in growth, a difficult premise to contradict given the company’s record. And the need to do so has not disappeared.
Apple’s industry-leading position is far from unassailable. It faces growing competition, both in smartphones and tablets. And, crucially, the question of whether its famed ability to innovate on new products and design can survive the death of its co-founder Steve Jobs is as yet unanswered.
Tim Cook, who took over as chief executive last year, is perhaps less averse than his notoriously parsimonious predecessor to spending Apple’s cash. A special dividend, or a share buy-back, are also on the list of his options. But branching out into a new area – some have suggested a bigger commitment to the world of television – might do more to persuade investors that Apple will remain at the top of the tree.