Apple Inc.’s piggybank, stuffed with $51 billion in cash and investments, is earning a lower return than a typical U.S. savings account. Some investors say Steve Jobs should put that money to better use.
Apple got a 0.75 percent return on the investments in the past fiscal year, according to a regulatory filing last week. The gain pales next to the roughly 10 percent investors would have earned from the Standard & Poor’s 500 Index and the Dow Jones Industrial Average over that time. Apple’s stock itself also was a much better investment, rising 60 percent.
Jobs, Apple’s chief executive officer, said last month that the company has a good track record of using cash, saying it’s holding money for one or more “strategic opportunities,” rather than a dividend or stock buyback. For some shareholders, the cash hoard is overkill, especially considering Apple added about $17 billion to its balance sheet last year, though they don’t want a big, overpriced acquisition either.
“That amount of cash is way above what’s needed to have a prudent war chest,” said Keith Goddard, CEO of Tulsa, Oklahoma- based Capital Advisors Inc., which has $822 million under management, including Apple shares. “It would be a real shame for them to do an acquisition to get into another line of business or dilute something they already have going on.”
Goddard is less concerned about Jobs’s stewardship than about what may happen if the executive, a cancer survivor, departs for health reasons. “The idea that a different management team is in charge of all that liquidity is more scary to me,” he said.
The stock has climbed 44 percent this year, and it has more than tripled since the 2007 introduction of the iPhone. Apple, the third most valuable company based on market value, also had $180 million in unrealized gains from its investment portfolio during the year, up from $57 million a year earlier.
The company has enough cash to pay a large dividend, make a share repurchase or spend tens of billions on a business without having to finance the deal with debt. Apple ranks fifth among companies in the Standard & Poor’s 500 Index with the most cash that don’t pay a dividend, according to Bloomberg data. It also has never made an acquisition larger than $500 million. Analysts and shareholders say the most likely scenario is that Apple will use its hoard to invest in new products and keep cutting small deals aimed at acquiring technology and engineers.
“We’ve demonstrated a really strong track record of being very disciplined with the use of our cash,” Jobs said in a Oct. 18 conference call with financial analysts. “We don’t let it burn a hole in our pocket. We don’t allow it to motivate us to do stupid acquisitions. And so I think that we’d like to continue to keep our powder dry because we do feel that there are one or more strategic opportunities in the future.”
Steve Dowling, a spokesman for Cupertino, California-based Apple, declined to comment beyond the previous remarks.
Apple contrasts with some other large technology companies that are increasingly using dividends and stock buybacks. Microsoft Corp., the world’s biggest software maker, boosted its dividend 23 percent in September. It’s also stepping up share repurchases, though the company is relying on debt -- rather than just its cash -- to pay for the effort.
Cisco Systems Inc., the largest networking-equipment supplier, announced plans in September to pay the first dividend in the company’s history. Unlike Apple, Microsoft and Cisco shares have lost value this year, putting more pressure on them to find other ways to reward investors.
Bigger Than Costa Rica
Apple had $25.6 billion in cash and short-term investments as of Sept. 25, and double that amount when including the longer-term holdings. That means the total is larger than the gross domestic product of Costa Rica last year ($50.1 billion).
Money in an average personal savings account would earn almost 0.8 percent in annual interest, more than Apple’s return, according to Bankrate.com. Technology companies rarely earn a high return on their cash and investments, though Google Inc. has done a bit better, according to Aaron Kessler, an analyst at ThinkEquity LLC. Google got 2.9 percent last quarter on its cash and investments, including interest income and realized gains before tax, he said.
Ryan Jacob, chairman and chief investment officer of Jacob Funds in New York, would like to see more cash returned to shareholders. Apple is the biggest holding in his firm’s Jacob Internet fund, with almost $3 million of stock as of Sept. 30.
“The point is they can’t keep accumulating it,” Jacob said. “I don’t understand the hesitation about a stock buyback and/or dividend.”
Ashok Kumar, an analyst with Rodman & Renshaw LLC in New York, said investors should trust the company’s judgment, given its recent history. The stock, which passed $300 for the first time last month, gained $4.19, or 1.4 percent, to $308.37 at 10:06 a.m. New York time in Nasdaq Stock Market trading.
“We could argue until the cows come home whether the single-digit returns on $50 billion in cash is optimal for shareholders, but the stock performance speaks for itself,” said Kumar, who rates Apple “market outperform.” “If you want higher returns, you have to take more risks and there is no reason for them to do that.”
Adding a dividend would bring in new investors who only buy stocks that pay one, said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. He wrote an open letter to Jobs and Apple’s board in August asking for the company to return cash to shareholders, calling the war chest “excessive.”
Apple may be preparing to make more acquisitions, even if they’re not large transactions. It hired a Goldman Sachs Group Inc. investment banker, Adrian Perica, last year to help cut deals, people familiar with the matter said at the time.
Potential targets might include Akamai Technologies Inc., which would give the company thousands of new servers for distributing content across the Web, said Brian Marshall, an analyst with Gleacher & Co. in San Francisco. Netflix Inc., which would add movies and TV shows to Apple’s library of material, is another possibility, he said.
Kumar doesn’t expect Apple to make that kind of a multibillion-dollar deal. Jobs has traditionally looked for smaller companies that fill a niche, he said. In 2008, Apple bought chipmaking startup P.A. Semi Inc. In January of this year, the company acquired Quattro Wireless to gain a foothold in mobile advertising, and in April it purchased Siri Inc., a maker of software that allows people to search the Internet from their phones with voice commands.
Absent a major acquisition, buyback or dividend, what is Apple doing with its money? Part of the answer lies in Reno, Nevada, the self-proclaimed “Biggest Little City in the World.” In the gambling town about 10 miles from the California border in the Sierra Nevada mountains, Apple has established an asset management company called Braeburn, named after a tart and sweet variety of apple. The firm was established in 2005, according to the Nevada Secretary of State’s office.
Apple also is spending more on its business, including a $1 billion data center that’s being completed in North Carolina. Apple devoted $1.78 billion to research and development in 2010, up about 34 percent from $1.33 billion in 2009. Sales and other administrative costs rose 33 percent to $5.5 billion, as the company spent more on retail.
Advertising costs increased 38 percent to $691 million in 2010. The company also hired 12,300 people and now has 46,600 full-time employees, according to regulatory filings.
Apple’s cash pile shows how far it’s come from the mid- 1990s, before Jobs returned to the company after a 12-year absence. In 1995, Apple reported a cash position net of short- term borrowings of $491 million, according to SEC filings. The company’s operating expenses amounted to $183 million per month, leaving it with only enough cash to fund operations for less than three months, according to the documents.
In 1997, Apple acquired NeXT Software Inc., the computer company Jobs founded after he left in 1985. He took the reins later that year, eventually overseeing the introductions of the iMac, iPod, iTunes, iPhone and iPad.
“They were pretty close to going out of business and when you have a situation like that, it leaves a permanent mark in your memory bank,” Marshall said. “It’s got to be the best turnaround story of all time.”
© Copyright 2014 Bloomberg News. All rights reserved.