There was plenty of press last week when Apple announced it’s 3rd quarter earnings. Much of the attention was on the size of the cash pool Apple has accumulated. Here’s the balance sheet:
Cash and other liquid securities total $76 billion and represent more than 70% of Apple’s book assets.
Retaining cash is the premier risk management tool. But holding cash is costly since shareholders have other investments they can make with those dollars. Companies have to balance the value gained by holding an extra dollar of cash against the value lost by not returning it to shareholders. Determining the right balance is a constant source of friction between management and shareholders, and among different shareholders.
Predictably, Apple’s growing pile has incited divided commentary. The Wall Street Journal‘s coverage by Yukari Iwatani Kane includes competing points of view. On the one hand,
Toni Sacconaghi, an analyst with Sanford C. Bernstein & Co., said a share repurchase or dividend could help Apple attract investors managing value and growth and income funds. “We’re talking about a level of cash that’s preposterous by any metric,” said Mr. Sacconaghi. Apple, which has no debt, could easily borrow money at low interest rates to make a large acquisition if it wanted, he said.
And, on the other hand,
Of course, some investors are fine with letting Apple sit on the cash. “It provides me enormous comfort that their balance sheet is so strong,” said Mike Binger, a fund manager at Thrivent Asset Management, which owns Apple stocks. As far as he is concerned, “They have the flexibility to do whatever they want with it.”
How is a shareholder to decide when the pile is too large? US companies overall hold less than 10% of assets in cash. But Apple’s not just a typical company. Higher cash piles are the norm in the tech sector, where the average is closer to 30%. Google’s most recent quarterly filing showed its cash hoard at 60% of assets. Like Apple, Google pays no dividends. Cisco’s cash hoard is at 50% of assets. Clearly Apple’s hoard is large even by this standard.
In April, Cisco initiated a quarterly dividend, effectively deciding it had accumulated a more than plentiful pile given the opportunities it faced.
How large would Apple’s cash pile have to grow before it’s pile, too, would be too large?