Poll: How Should Apple Spend Its Excess Cash?
In a poll conducted earlier this week in the CFA Institute Financial NewsBrief, we asked readers what would likely provide Apple shareholders with the greatest risk-adjusted return on the company’s excess cash.
Poll: What is likely to provide Apple shareholders the highest risk-adjusted rate of return on the company’s excess cash balances?
The $137 billion in cash that Apple (AAPL) currently has sitting on its balance sheet exceeds the entire market values of technology peers Cisco (CSCO) and Intel (INTC), prompting investors to consider anew how Apple should invest this stockpile or otherwise return it to shareholders. And while opinion is divided, most respondents to our poll think investors would be best served if Apple returned excess cash to shareholders in the form of dividends or share repurchases.
Nearly 45% of respondents to this week’s poll think Apple should reward shareholders with either an increased dividend or special dividends, while just over 32% of respondents believe share repurchases would offer stockholders the best risk-adjusted return. Acquisitions are widely viewed as a less attractive option, with support from just 9% of respondents. And despite the tremendous value delivered to shareholders over the past decade, only 8% of NewsBrief readers think Apple’s current capital investment policy offers the best return prospects. Hedge fund manager David Einhorn shares this view, which explains why he recently proposed that Apple issue a “perpetual preferred” stock. Only 5% of respondents think this proposal is the best course of action for Apple. With cash representing about 31% of its current market capitalization, Einhorn thinks Apple shares are being penalized by the market and that issuance of preferred shares would help to unlock considerable value in the common stock. Critics of this strategy, including Aswath Damodaran, see Einhorn’s plan as financial engineering rather than value creation.
For its part, Apple has said that its management “has been in active discussions about returning cash to shareholders.” Overlooked by many is the fact that $94.2 billion of Apple’s cash balance is held by its foreign subsidiaries and, absent a change in tax law, repatriating it to pay for dividends or share repurchases would incur taxes. In March of 2012, Apple announced that it would start paying out $45 billion to shareholders over 3 years via dividends and buybacks. It seems most likely that Apple will accelerate or expand this plan.
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AAPL too late to the party for Q4/2012 dividends.Repatriation and then paying dividends triggers double-taxation at now-higher rates. Share buybacks and offshore investment (i.e., acquisition) are the best options, in my opinion. Share buyback has the advantage that the shareholder has the option to tender shares. Generally, I think that tax considerations should not drive investment (i.e., capital) decisions, but I would hold-off for a US reduction in corporate tax rates. Admittedly, that may not happen anytime soon.
I think most voters misunderstand Einhorn’s proposal. His proposal is to pay out a portion of future operating cash flows via preferred dividends. It has nothing to do with existing cash balances. In fact, the board can later suspend future preferred dividends if they wanted to without penalty (except of course to the holders of those prefs via rapid depreciation in pref share prices).
I guess at the end of the day its a signalling effect on what they use cash for. Ideally, most tech companies would like to keep 1-2yrs of operating expenses as cash to avoid any massive techonological recessions or to combat failed products. However any dividend or buyback would signal that apple no longer have any project where they can invest surplus cash and generate risk adjusted returns which are more than WACC for shareholders. That would be a bad signal for any growing tech company.
However, Apple could try to diversity its product line and can massively fail/succeed if required or think of using the cash at a better place like M&A (pitfalls or accretive etc) or just decide to keep it on B/sheet and decrease purchasing power.