Apple Inc.has built up a $76.2 billion cash hoard. Now the question is what the company intends to do with the money pile.
On Tuesday, the Cupertino, Calif., company disclosed cash, including short-term and long-term marketable securities, for the quarter ended June 25 increased 15.8% since March to $76.2 billion. That's more than the gross domestic product of 126 countries, including nations such as Ecuador, Bulgaria, Sri Lanka and Costa Rica, according to data from the World Bank.
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The gigantic sum on Wednesday prompted some investors to call for it to use some of the cash for dividend payouts. "If they can't find ways to use it to grow, they should be returning it to shareholders," said Tim Ghriskey, chief investment officer of Solaris Asset Management, which owns Apple stock.
Asked to comment, an Apple spokesman referred to a long-standing policy as outlined by Chief Executive Steve Jobs last October. he said at the time.
"We strongly believe that one or more very strategic opportunities may come along that we can take that we're in a unique position to take advantage of because of our strong cash position."
The cash puts Apple at the head of a pack of large technology companies that have been stockpiling cash in recent years. Microsoft Corp., for example, has built up its cash levels to $60.9 billion, including equity and others investments as of March. Google Inc. has $39.1 billion and Cisco Systems Inc. $43.4 billion by a similar measure as of their latest reporting periods.
Many corporations have accumulated cash because of economic uncertainty over the last several years.
According to ratings agency Standard & Poor's, total cash and cash equivalents for the 500 largest U.S. companies by market capitalization was $963 billion at the end of the first quarter, up from $837 billion a year ago. The sums accrued by tech companies, which operate in sectors where industry trends can shift quickly, necessitating a bigger safety net.
Apple has amassed "just an enormous war chest of money," said Howard Silverblatt, a senior index analyst for S&P.
Tech companies that build cash often walk a fine line with shareholders. They often shun dividends, which typically are associated with mature, slower-growing companies, preferring to view themselves as young and faster growing. Fast-growing companies often need cash to finance that growth.
Only recently, for instance, have tech titans Microsoft and Cisco finally made the switch and begun issuing cash dividends to shareholders.
Apple, however, continues to grow at astonishing rates, fueled by sales of its iPad tablet computer and iPhone smartphone. On Tuesday, the company said its fiscal third quarter revenue rose 82% from a year earlier. Its market capitalization was nearly $358 billion on Wednesday.
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.
Mr. Sacconaghi said.
"We're talking about a level of cash that's preposterous by any metric."
Apple, which has no debt, could easily borrow money at low interest rates to make a large acquisition if it wanted, he said.
Apple tends to be conservative about its cash because of its history, in which the company almost failed for lack of cash in the 1990s before Mr. Jobs returned to the company that decade and put it on a growth track.
Aside from buying telecommunications-related patents from Nortel Networks for an undisclosed sum in late June, Apple has made no acquisitions this year. It has made small acquisitions in the past; its biggest was in April 2008 of semiconductor company P.A. Semi Inc. for an estimated $278 million.
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."
COMMENTARY: Hoarding cash is not an Apple phenomenon. US non-financial corporate cash balances have been climbing steadily since they bottomed at $400 billion during the financial meltdown of September 2008. By October 31, 2010, non-financial corporate cash balance were $950 billion and climbing.
According to Capital IQ data for the 1st quarter ending March 31, 2011, from 376 nonfinancial S&P 500 companies, or about 91% of the nonfinancial companies in the S&P 500, aggregate cash and short-term investment balances total $1.023 trillion. That marks the second-consecutive quarter of cash balances of above $1 trillion, following the final quarter of 2010.
Three sectors--information technology, health care, and industrials--account for a large share of nonfinancial cash totals. Presently, these three sectors account for 67.3% of nonfinancial S&P 500 cash totals, compared with 67.2% in the final quarter of 2010. However, about 75% of the present sequential quarterly increase in cash totals (about $21 billion) was due to the increase in cash totals from the technology, health care, and industrials sectors.
According to an article in the New York Times, American multinational corporations have kept abroad more than $1 trillion worth of foreign earnings accumulated over the last five years, according to government data. An article by David Kocieniewski in The Times noted that Microsoft has $29 billion offshore, Google has $17 billion and Apple has $12 billion.
Multinational companies say they could repatriate hundreds of billions in foreign profits and pump them into domestic investment and hiring, but only if Congress and the White House agree to cut the tax rate on those profits to 5.25 percent from 35 percent. They call their plan “the next stimulus.” Sounds more like extortion.
According to Federal Reserve data, companies in the United States have $2 trillion stashed in bank accounts, Treasury securities and other investment-ready assets. And this excludes cash held abroad by their foreign subsidiaries to avoid taxes.
U.S. financial institutions are also hoarding cash. According to the Federal Reserve, at the end of April 2011, U.S. financial institutions held over $1.6 trillion in cash in excess of their reserve requirements.
There is plenty of cash, it's just that corporations are not spending it, preferring to save it for a "rainy day", pay dividends to their shareholders or are waiting for the right business investment opportunity. US Banks are not lending either, because they are holding on to over 1 million foreclosed properties which they may need to writedown, and this time around, there is not going to be a second federal bank bailout, and are waiting for the housing industry and overall economy to show more positive signs of a full recovery.
At end of September 30, 2010, Apple ended the year with $51 billion cash, Apple CEO Steve Jobs said at the time that he was keeping his options open just in case the right business opportunity should arise. Nine months later, Apple now has $76 billion in cash, and many forecaster's believe that by the end of 2011, he could have as much as $100 billion in cash, because of the introduction of the iPhone 5 later this year, sales from filling a huge backlog of orders for the iPad 2, and yet to be announced new products.
So what should Apple do with its huge $76 billion cash hoard?
In a blog article dated March 28, 2011, I commented on Steve Job's Digital Hub Strategy, his grand vision for Apple, and undoubtedly the key reason for the company's stellar success. Clues to what Steve is going to do with that $76 billion in cash lie there, but only Steve knows for sure.
To get a better understanding of Steve Jobs, I highly recommend that you read "Inside Steve's Brain" by Leander Kahney and "The Innovation Secrets of Steve Jobs" by Carmine Gallo.
PREDICTION: In an earlier blog article dated October 20, 2010, I made a bold prediction what I thought Steve Jobs would do with the $51 billion in cash Apple had at the end of the fiscal year ending September 30, 2010. That prediction falls in line with Steve's Digital Hub Strategy, but only Steve knows for sure. I still believe the any acquisition must become another "spoke" to the Digital Hub Strategy", and my above prediction, although very bold, still remains viable and a great fit to Jobs' digital strategy. You will have to click on the above link to find out about my prediction.
To date, Steve has chosen not to spend any of that cash, at least on anything major, preferring to make very small acquisitions and strategic partnerships like the one he did to incorporate Twitter within its OS 5 operating system.
Courtesy of an article dated July 21, 2011 appearing in The Wall Street Journal
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