Apple and it’s money


Sometime back I’d blogged about the global and local tendency for companies to hoard cash.  Tech companies in the US have an average cash to asset ratio of 27%.  Apple has $ 46 Bn in cash reserves.  To put the magnitude of that number in context, there are more than 100 countries who have a GDP less than that, and 450 out of the S&P 500 have a lower market capitalisation.

People have spoken about it for a long time.  But one analyst has now gone one step further and written an open letter to Apple.  Full text of the letter available on ZDnet here.  It’s worth reading the whole piece, but if you’re starved of time – here’s the gist:

  • Current cash levels are excessive relative to what Apple requires to run its operations.  The estimated requirement for Apple is $ 10 Bn, leaving a surplus of $ 36 Bn
  • Prevailing returns on cash are very low, destroying shareholder value. Apple earned 0.76% interest on its cash reserves vs. an implied expected return of ~11% on the stock
  • A return of cash would create financial discipline and alleviate investor concerns about a potentially imprudent acquisition. Apple’s burgeoning cash balance creates the perception that the company may spend it on large acquisition(s) that shareholders believe might be value-destroying longer-term
  • A return of cash to shareholders could attract a new class of investors.  Some investors are ideologically opposed to investing in companies that lack a clear policy on cash usage
  • Three broad options exist for a return of cash: (1) a one time dividend; (2) ongoing dividends, and (3) share repurchases. The belief is that investors’ bias – even in the face of changing tax laws – is for Apple to institute a regular dividend coupled with buybacks

Hmm.  I think the argument would be relevant to a whole bunch of Indian companies.  Are there any analysts writing letters out there?

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: