So what are they saving up 40B$ for?

  • Posted: 01 October 2010 12:22 AM #61

    Roman - 30 September 2010 01:13 AM
    cranium - 30 September 2010 12:56 AM

    You want all these big holders selling? I’m not sure I’ll be able to tell that’s the reason my apple portfolio dropped, I may not be feeling happy about that. Usually i prefer when AAPL goes up, not sure why.

    Let me be clear, I’m not suggesting a dividend of the size that would start burning off the cash horde, merely enough to partially offset the soon to be increasing rate of growth.

    I don’t buy the argument. People (and institutions) invest for profit. Profit comes in 2 flavors:
    1) Capital appreciation
    2) Dividends

    Dividend-paying companies are typically slow-growth, maturing, or mature companies, and investors do not foresee further growth.

    Growth companies do not typically pay out dividends. Apple is a growing company. Rational investors that are in AAPL right now should have invested for only one reason: capital appreciation.

    I don’t understand the type of investor who buys AAPL today in the hopes of maybe paying a one-time dividend tomorrow.

    Moreover, dividends are taxed twice. Capital appreciation is superior.

    Finally, to reverse your argument, paying a dividend would attract new investors (the dividend-loving folk) but those investors tend to be risk averse and very-very impatient. Any hiccups in growth will result in sell-offs and further price swings.

    You said “typically”, and I’ll certainly agree with you 100% on that. However, AAPL is in no way typical. IF it was, we’ve got a market cap ceiling above us the days of growth are not long for us.

    I’ll also 100% agree with you that AAPL investors are here for one reason, that being capital appreciation. What else would they be here for?

    I think AAPL is unique, and as well described by JonathanU, Apple is well positioned to be an atypical company that can afford a dividend while still growing like crazy.

    I may not have been clear in my earlier post, when I said to ‘partially offset growth’, I hope you know I meant to partially offset growth in the cash hoard. It seems likely that the rate of growth of the cash will continue to increase the next couple of years, and the benefits of the cash are diminishing as it grows to immense proportions. Dividends wouldn’t be my number 1 choice, all options to increase production would be first, and I love the idea of opening more Apple retail stores. However, I think even acceleration of those plans still leaves the pile growing each quarter. Increasing the spend on production and stores, plus 2B for a dividend, and I STILL see some growth in the cash each quarter, just significantly reduced from today.

    I will disagree with you that dividend investors are more impatient and will increase price swings. I see them as more patient, and they feel less pain during pullbacks as their yield grows. There are a lot of institutional money managers who have income generation as a goal, it certainly would not be a bad thing to add this class of funds to the big names who are creating demand for our favorite stock.

    I see AAPL as undervalued relative to growth even if you forget the cash. If you compute it ex-cash, the valuation actually seems crazy relative to growth. I love the large base of cash for all the reasons mentioned, but keeping it growing at its present pace when future increments will do little for us makes no sense to me. Yes, with AAPL, I think we can have our capital appreciation cake, and frost it with a little bit of dividends too.

         
  • Posted: 01 October 2010 01:20 AM #62

    A major use of the cash is to prepay for supplies. Apple has done this in the past to ensure adequate supplies of RAM (in all forms) as well as screens. Prepayment requires a large amount of cash depending on the time frame. Remember there is no cash coming in until the parts are used and the machines sold. As Apple’s manufacturing scales the cash requirements for prepayments grow exponentially.

         
  • Posted: 01 October 2010 06:29 AM #63

    @MacOz - if you check AAPL’s working capital requirements, you will see that inventories are very much an insignificant figure in comparison to the $45.6bn in cash on the balance sheet.  Yes Apple has in the past used large cash gaurantees to buy supply, however, we’re talking in the millions, not in the multi-billions range.  Apple has more than enough cash to finance it’s working capital and capex needs, hence why their cash hoard is sitting in treasury bonds etc.  If they needed it, it would be used.

    @Cranium - you are 100% correct.  AAPL is unique.  When you look at various financial metrics you realise how fabulously profitable the business is.  Eventually there will be an embarrassment of riches and something will have to be done about it (much like what happened at MSFT with their special dividend.  At that point MSFT had about $54bn on the balance sheet and realised it had no need for it).  This moment I reckon is pretty close at hand.  In say 2 to 3 quarters, there will be upwards of $60bn in surplus cash.  That by any measure would be outrageous…

         
  • Posted: 01 October 2010 08:52 AM #64

    JonathanU - 01 October 2010 09:29 AM

    @MacOz - if you check AAPL’s working capital requirements, you will see that inventories are very much an insignificant figure in comparison to the $45.6bn in cash on the balance sheet.  Yes Apple has in the past used large cash gaurantees to buy supply, however, we’re talking in the millions, not in the multi-billions range.  Apple has more than enough cash to finance it’s working capital and capex needs, hence why their cash hoard is sitting in treasury bonds etc.  If they needed it, it would be used.

    @Cranium - you are 100% correct.  AAPL is unique.  When you look at various financial metrics you realise how fabulously profitable the business is.  Eventually there will be an embarrassment of riches and something will have to be done about it (much like what happened at MSFT with their special dividend.  At that point MSFT had about $54bn on the balance sheet and realised it had no need for it).  This moment I reckon is pretty close at hand.  In say 2 to 3 quarters, there will be upwards of $60bn in surplus cash.  That by any measure would be outrageous…

    I am not talking about working capital needs. If you look back a few years Apple was prepaying in the billions for RAM and LCD screens. They were paying cold hard cash. Not guarantees. This is not about inventory and working capital. This is about having a guarantee of parts at lowest possible price and also locking supply away from competitors. Works like a dream when economies are bad and suppliers are grateful for cash.

         
  • Posted: 01 October 2010 09:14 AM #65

    MacOz - you’re absolutely right re W/C and capex.  However will you agree with me that regarding prepayments for input goods we are talking about a few billion per year, if that?  I have dug around and found the following evidence of prepayments for supplies (I’m sure there are more):

    http://www.pronetworks.org/forums/apple-buys-500-million-worth-of-flash-memory-t109585.html
    http://www.apple.com/pr/library/2005/nov/21flash.html
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHQrwx1p12qw

    No doubt they do need a sizable amount of cash to go out and make these arrangements, and I do agree that it does give Apple a competitive advantage in being able to practically lock up whatever supply of goods they need.  However, there is no way they would ever need to have $50bn in cash to be able to extract the benefits from this.  There is a point in time when the costs of holding more cash on the balance sheet outweighs the benefits.  Personally I think we passed that point a while back…

         
  • Posted: 01 October 2010 09:21 AM #66

    I am fine with Apple keeping the cash. I also do not care about seeing a split.

    The only additional use I would like to see a portion of the cash used for is a systematic share buyback program.

         
  • Posted: 01 October 2010 10:24 AM #67

    JonathanU - 01 October 2010 12:14 PM

    MacOz - you’re absolutely right re W/C and capex.  However will you agree with me that regarding prepayments for input goods we are talking about a few billion per year, if that?  I have dug around and found the following evidence of prepayments for supplies (I’m sure there are more):

    http://www.pronetworks.org/forums/apple-buys-500-million-worth-of-flash-memory-t109585.html
    http://www.apple.com/pr/library/2005/nov/21flash.html
    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aHQrwx1p12qw

    No doubt they do need a sizable amount of cash to go out and make these arrangements, and I do agree that it does give Apple a competitive advantage in being able to practically lock up whatever supply of goods they need.  However, there is no way they would ever need to have $50bn in cash to be able to extract the benefits from this.  There is a point in time when the costs of holding more cash on the balance sheet outweighs the benefits.  Personally I think we passed that point a while back…

    I agree that there is no ostensible reason to hold so much cash. However Apple’s management has been doing a good job so far so I’d give them a pass for the time being. Don’t mind them holding the cash as it provides a base for the share price. Don’t mind a share split as it makes it cheaper for mom and pop to buy in. Do not like a share buy back as like Mace says, it is only a short term effect. While share buy backs theoretically maximise shareholder value I prefer to err on the conservative side and maximise gains over the long term - whether long term be 5, 10 or even 20 years. Not keen on short term gains as you then have to find the next best thing to invest in. Too stressful for my health. grin

         
  • Posted: 01 October 2010 10:56 AM #68

    I don’t really follow the argument that stock buybacks lead to a short term gain or that it only has a short term effect on a stock? The only effect it has on the stock is to decrease the number of shares outstanding whilst simultaneously decreasing the net cash position of the business.  It shouldn’t have any effect on the returns for those already invested in AAPL before the buyback commences.  It is only a transfer.

    With regards to a stock split, I am ambivalent. Do it or not, either way it won’t affect the share price of AAPL in the long term.

         
  • Posted: 01 October 2010 02:28 PM #69

    JonathanU - 01 October 2010 09:29 AM

    At that point MSFT had about $54bn on the balance sheet and realised it had no need for it).

    ...until Ballmer thought it would be a good idea to buy Yahoo and eventually figured out that MS didn’t have enough cash.

         
  • Posted: 01 October 2010 03:24 PM #70

    LOL, not buying Yahoo was probably the best thing to happen to MSFT shareholders in a long time.

         
  • Posted: 01 October 2010 03:30 PM #71

    Implied by my comment. Nevertheless, you never know when you’re going to need that big stash.

    (BTW, Ballmer is the best competitors’ gift to AAPL shareholders ever. As macdailynews.com says, may he remain MSFT CEO as long as it takes…)

         
  • Posted: 02 October 2010 12:24 AM #72

    I can’t even believe we’re still having this conversation. The management of Apple isn’t stupid. They didn’t “accidentally” accumulate 40 billion dollars. Obviously they have a plan for it that they don’t want to share with us.

    Do you think they deserve the benefit of the doubt? I sure as hell do.

    [ Edited: 02 October 2010 05:59 AM by FalKirk ]      
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    Posted: 02 October 2010 01:53 AM #73

    Could we spend a few brain cells thinking what $10-40B might be used for? Perhaps multiple data centers located around the world (whatever they are used for). Perhaps a WiMax type wireless network to blanket the US?

    What are some things that cost real money that would advance the progress of Apple?

         
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    Posted: 02 October 2010 01:58 AM #74

    FalKirk - 02 October 2010 03:24 AM

    I can’t even believe we’re still having this conversation. The management of Apple isn’t stupid. They didn’t “accidentally” accumulate 50 billion dollars. Obviously they have a plan for it that they don’t want to share with us.

    Do you think they deserve the benefit of the doubt? I sure as hell do.

    Obviously.  I see no harm doing some idle speculation to exercise the brain cells.

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    Posted: 02 October 2010 03:10 AM #75

    Me neither.  It’s fun!

    Adding up the liquid and marketable assets, IIRC Apple has close to $50B in cash.  It wouldn’t surprise me if that number doesn’t stop growing for some time yet, maybe as high as $100B. 

    “I will never go hungry again (but will buy supply, capacity, technology, small companies, etc. when it suits my business strategy)” is a good enough reason to pile up the cash.  As DT and others have pointed out before, we may think of Apple’s management as being ingenious by passively earning ridiculous amounts of interest on the cash stash when the economy eventually gets going again.

    [ Edited: 02 October 2010 03:35 AM by Mav ]

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