The last six months have not been kind to Apple. Their share price has fallen about 30%. They briefly held the record for the all-time highest market capitalization of any firm. They released their first products since Steve Jobs passed away, to mixed acclaim. I should admit up front that I’m writing this post on an Apple computer with at least four other Apple products within 3 meters. I’ll try to remain neutral.
Despite the stumbles over the past six months, Apple has been an astounding success for the past decade. If you had sunk $1,000 into Apple stock (AAPL) 10 years ago, you’d have roughly $60,000 now. No matter how pessimistic you are or how much you dislike Apple products, that is an incredible return. Beyond that amazing return, what makes Apple interesting? Or at least from an accounting perspective?
Apple is sitting on a ton, a TON, of cash. In their latest annual financial statements (September 29, 2012) they report $10.7 Billion in cash. Scroll through the attached annual report to find the balance sheet on page 44. That $10.7 Billion in cash is in addition to $18.4 Billion in short term investments and another $92.1 Billion in other liquid investments. Why does Apple need approximately $120 Billion in cash and investments? They don’t. Most companies operate with very little cash on hand, barely scrapping enough cash together to pay the electricity bill or pay employees. Apple is on the complete other end of the spectrum.
A humourous article points out that Apple’s cash reserves are enough to purchase 100% ownership in Starbucks, Facebook and Yahoo. Yes all three together. Corporate finance theories suggest that cash management is very important for a business to succeed. A business needs to have enough cash on hand, but not be wasteful. Once a business gets to a stable point, they generally start repaying shareholders via dividends. Remember that dividends are NOT an expense, they are a return of earnings and therefore reduce retained earnings. Apple refused to pay dividends for years, arguing that it needed its massive cash resources for company purchases and to fund its large research and development costs. Finally a year ago, Apple decided that it had more cash than it could ever use so it began paying dividends. The third such dividend was just paid out last week, $2.65/share or about $2.5 Billion in total. As dividends go that’s fairly large, but you need to think of the dividend as a proportion of the cost of purchasing the share. That’s referred to as the dividend yield and for Apple is a paltry 2.4%.
Apple is currently involved in a complex lawsuit regarding the dividend payout. It is important to note that with the current dividend rate, Apple is “only” paying dividends of $10 Billion per year and there are plenty of projections out there that suggest Apple will generate substantially more net cash from operations every year so their cash reserves could in fact be growing. Apple is an interesting case study – they were almost bankrupt 25 years ago and some experts suggest that their cash hoarding is the result of a “depression era” mentality – they are so petrified of being near bankruptcy again that they play a very conservative game. The other issue is that Apple is notorious for leaving significant (almost $100 Billion) cash overseas in other countries. That overseas cash and profit was generated from legitimate sales of their products and services worldwide. In most cases Apple has paid the domestic (i.e. local country) income taxes as required by the local jurisdiction. Apple has taken advantage of a few low-tax countries, that’s not nefarious, its solid business planning. The problem is that the US makes it very difficult to repatriate overseas earnings, that is, bring the money back into the US.
There are three good lessons to learn here:
- Cash is important which means that a company’s dividend policy is also important. If it’s too high then the company will run out of cash. If it’s too low, investors will be less happy.
- International taxation and cash management is complex.
- Psychology and history impacts business decisions. We need to understand the past before we can understand current decisions.
Note: this blog was originally posted on my site hosted by Pearson Education(http://php2.pearsoncanada.ca/highered/inthenews/accounting_in_the_news/)