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ANALYSIS
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Bloomberg
February 25, 2008 12:01 AM ET
Talk about your apple juice: The computer company’s current cash position is $18.4 billion, up an astounding 20% in a single quarter. Analysts and investors cite Steve Jobs’ legendary insecurity over Apple’s competitive position, rational or not, as the reason such a large pile of cash is idling away on the balance sheet. As a result, they have little expectation that Apple will issue a dividend, engage in a stock buyback or undertake significant M&A activity to reduce its cash stake. And that makes some of them angry. “It’s outrageously high,” Gene Munster, senior research analyst at Piper Jaffray, said of Apple’s cash position. In its fiscal first quarter, Apple added another $3.1 billion in cash to its balance sheet. That means approximately 60% of Apple’s roughly $30 billion in total assets as of the fiscal first quarter was in cash. Or, put another way, its total $18.4 billion in cash, cash equivalents and short-term investments breaks down to about $21 of pure cash per $119 share of Apple. Although Mr. Munster and others say they are frustrated by the size of Apple’s cash portfolio, it’s not likely that the company is planning to do anything about it anytime soon. Apple CFO Peter Oppenheimer was not made available for an interview, but a company spokeswoman pointed to his remarks in Apple’s first-quarter earnings conference call last month, when an analyst asked what the company was planning to do with all of that cash. “We are, I think, managing the business very, very well,” Mr. Oppenheimer said. “Stock buyback programs and other forms of returning the cash are discussed with the board from time to time. But our preference continues to be to maintain a strong balance sheet in order to preserve our flexibility to make strategic investments and/or acquisitions.” That desire to be nimble comes from deep within Apple’s culture, said Andy Hargreaves, a senior research analyst at Pacific Crest Securities. Back in the 1990s, the once-mighty Apple was losing hundreds of millions of dollars a year as it watched rival Microsoft roar past it. “They want to be ready to make any and all acquisitions that they want,” Mr. Hargreaves said, “and their experience through the 1990s and early 2000s, when the company was literally threatened, I think has led them to lean on the side of having a large cash position in case the worst happens. It’s a little bit strategic, and a little bit emotional.” Added Mr. Munster: “Given Apple’s history, you have to look at where the company has been over the last 20 years, and I think that plays into the culture of just keeping as much cash as possible. They went through some dark days, and they want to be able to financially weather any changes in the competitive landscape.” But entertaining serious mergers, a la Microsoft’s bid for Yahoo, isn’t really Apple’s style. Its approach to acquisitions has been to scoop up small tech shops and bring them into the fold. “It’s egotistical, but they believe they can do things better than most people,” Mr. Hargreaves said. “Trying to integrate [with a potential merger partner] would be more complex than the benefits would justify.” Adding a dividend or stock-buyback program seems equally unlikely. “I don’t think Steve Jobs would do a buyback even if the stock was $8,” said Tom Telford, a manager for two American Century mutual funds, Technology and Ultra. American Century holds 5.4 million Apple shares. “He just doesn’t believe in them.” And don’t count on investors to force Apple into such programs, as they did at Microsoft, which initiated a stock-buyback program and issued a one-time special dividend in 2004 because the company and its stock appeared to be stagnating. Apple, on the other hand, is pleasing investors with its splashy launches of innovative products, said Mr. Munster. “People generally trust Apple in regard to how they’ve used their money in the past.” Moreover, added Mr. Telford, Apple is using its cash hoard to commit to buying technology from other firms, such as the components that make the celebrated touch screens on the iPhone. Because vendors know the company has so much cash, Apple is often first in line. “Over the last few years, they’ve gotten some things that competitors haven’t been able to get,” Mr. Telford said. “It’s given them a big advantage.” Not much of that cash will go to research and development. The company spends 3% of sales on R&D, compared with 14% at Microsoft. And Apple’s high-flying stock has stumbled this year. To date, the stock has fallen 40%, to $119, compared with an 8.3% drop for the S&P 500 overall. Apple’s own management of its cash hoard is pretty boring. According to most recent quarterly filing, the company’s cash investment portfolio consisted mainly of Treasury and agency securities, corporate securities, including commercial paper, CDs and corporate debt, and foreign commercial paper. The vast majority of those instruments have maturities of less than 12 months. Investors likely need not worry that Apple executives are yield hogs, holding the corporate cash in auction-rate securities or enhanced cash products that recently have been problematic for other companies. But as a result of the recent cuts in interest rates, the company isn’t making as much return on its cash position. “I think it becomes more pressing of an issue, because the returns on holding the cash aren’t as much,” said Mr. Hargreaves. FW
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