Apple’s $100bn reserve ripe for spending

Financial Times

As Apple reaches $100bn in cash reserves, there is no shortage of suggestions about what it should do with its vast hoard. While the sum may be enough to buy Facebook or cover Greece’s debt payments for the next two years, the favourite option among analysts and investors is to start paying dividends to shareholders. Other options include share buy-backs, acquisitions, securing long-term component supplies – or simply doing nothing and continuing to stoke the coffers.

That last option seems less likely since the death last October of Steve Jobs, Apple’s abstemious co-founder, with the new chief executive, Tim Cook, suggesting to analysts soon after he took the reins that he was not completely averse to using some of the cash.

On an analyst conference call he admitted that Apple was very frugal but added: “I’m not religious about holding cash or not holding it. I’m religious about a lot of things but not that one.”

The rate of cash generation is also accelerating, forcing the management and board to address the issue. In the last quarter, Apple was adding cash to its coffers at a rate of more than $1bn a week. At that pace, Apple should have already crossed the $100bn net cash mark this month after finishing 2011 with $97.6bn in cash on hand.

On its earnings call on Tuesday, Peter Oppenheimer, chief financial officer, said the company was “actively discussing uses of our cash balance” but had nothing specific to announce as yet. “In the meantime, we continue to be very disciplined with the cash and are not letting it burn a hole in our pockets,” he added.

Two-thirds of Apple’s cash – about $64bn – is offshore. It would face a $22bn tax bill if it wanted to repatriate it, or 5 per cent of market cap, estimates Bespoke Investment Group.

Analysts have noted Apple’s reserves are worth $103 a share and its stock topped $450 this week following news of its blow-out October-December quarter. “With Apple expected to cross $100bn in cash during the March quarter, we believe this milestone might push Apple to announce a dividend,” said analysts at Canaccord Genuity in a note.

Shaw Wu, analyst at Sterne Agee, says paying a dividend makes a lot of sense, with Apple’s share-owning employees benefiting from the move. “It also brings in a new class of investors – there are a fairly large number of mutual funds out there that purchase only dividend-paying stocks, so they would expand the shareholder base and be more long-term holders of Apple stock,” he says.

However, paying dividends and share buy-back programmes are also characteristics of more mature, lower growth companies, an impression Apple would not wish to create.

There are clues to what Apple might do in its past actions.

If it makes acquisitions, they are unlikely to be multibillion-dollar ones because it has tended to buy or take stakes in small companies that can provide it with key technology advantages.

It bought Siri, which supplies the voice-powered personal assistant on the iPhone 4S and its latest acquisition is Anobit, an Israeli company that specialises in the Flash memory now used in most of Apple’s devices. For this it paid a reported $400m-$500m, making the company one of its largest acquisitions.

Apple has paid substantial sums to secure long-term supplies of essential components.

In 2005 it made more than $1bn in prepayments to several Flash memory suppliers and, a year ago, it announced it was spending $3.9bn on long-term supply agreements with three vendors, believed to be LG Display, Sharp and ToshibaMobile Display for LCD screens for the iPhone and iPad.

Apple’s spending on iPad and iPhone screens rose from $2bn in 2010 to $5bn last year, according to the estimates of Vinita Jakhanwal, analyst with the IHS iSuppli research firm.

“That’s a key area for Apple. This year they are looking at Sharp to help them with iPad 3 displays and they may want to invest there to help improve the yield for new displays using [indium gallium zinc oxide] – the first year those are being manufactured in large volume,” she says.

There are rumours also of much larger displays as Apple enters the television market. Sterne Agee’s Mr Wu says Apple’s cash would be well spent on media rights to give it a chance of success.

“It makes a tonne of sense to spend money on content partnerships, because that’s what we’re hearing is holding back Apple TV,” he says.

“They need content streaming rights or licensing of the use of live broadcast TV if they want to be aggressive in TVs. Those kind of deals would really ignite their television business.”

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