The apple never falls far from the tree

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.

Screen Shot 2013 02 21 at 8 35 16 PM

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:

  1. 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.
  2. International taxation and cash management is complex.
  3. 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(

Wholesale Dividends: Good or Just Special?

NewImageA number of US companies (including Costco, for example) are rushing to pay out massive dividends before December 31, 2012 to beat the dividend tax hike that is pending. A quick refresher on dividend taxes in the US: Under George W., long-term capital gains and dividends were subject to a temporary tax break resulting in a maximum tax rate of 15% (compared to normal business and employment income subject to a maximum tax rate of 35%). This tax holiday was supposed to have expired December 31, 2010 but was extended for two years by President Obama. Politically, dividend and capital gains tax rates are important. Those with less-than-average wealth generally don’t care about these rates since that set of the population doesn’t usually own investment portfolios that generate capital gains and dividends. However, the wealthy really do care, and they’re the ones who contribute to political coffers. But let’s leave the political aspects aside since they can be all-consuming on their own.



If you are a US company and you know the dividend tax holiday is about to expire, you would prefer to give your shareholders cash before December 31, 2012 so they would only pay the 15% tax rate. If you paid the dividend the next day, January 1, 2013, your shareholders would be subject to a maximum 40% tax rate (39.6% to be exact). That’s a big difference. Especially when your dividend payment is $675 million. What? Who gets dividends like that?? Well, the Walton family does. Yes—the founding family and controlling shareholders of Walmart. They own and control 51% of the shares of Walmart and have decided to trigger a one-time, special dividend of roughly $1.3 billion, of which their portion is roughly $675 million. Issuing the dividend by December 31, 2012 results in tax savings of about $166 million for the Walton family alone. That’s a big deal and smart tax planning.

In Costco’s case, the special dividend works out to about $7 per share. This is well above the normal dividend rate of about $0.14 per share and works out to a total of $3 billion. Interestingly enough, the very same day that Costco announced its special dividend, it also announced new debt offerings (meaning it will be borrowing from investors) of $3.5 billion. Do you see any connection between the two? Paying the dividend requires $3 billion in cash, but Costco needs that cash for day-to-day operations, so it borrows more cash.

Should we care? I think so. This is a clear case of tax policy driving economic decisions—maybe even bad economic decisions. In Costco’s case, the US Treasury will collect substantially less tax than if the dividend was paid a month later, and the interest cost on the new debt is tax deductible for Costco, which will decrease its taxable income for years to come. In my opinion, this is a clear case of a wealth transfer to the rich at the expense of the general US tax payer, or at least the expense of the US government. There are some potential arguments to justify such behaviour but I don’t find them compelling. I will chalk this up to a capitalism #fail.

Note: this blog was originally posted on my site hosted by Pearson Education(