Image by AFP via @daylife
Since Apple’s last earnings call in particular when its cash balance approached $100B, countless articles have argued that Apple should dividend the cash back to shareholders or buy back stock, basically, the same exercise. Herein are three reasons why we as investors want Apple to keep their cash and, if anything, simply do a stock split.
Apple has almost 20% of its stock price in cash. It was almost religion at Apple to hold on to the cash when Steve Jobs was at the helm. Even so, at each step of the way since its stock has been in the $50s, investors have pounded on Apple to return cash to shareholders. Now with a change at the top and a perceived voice at the table, there seems to be renewed feverish interest in the cash. The corporate finance theory is that companies should dividend excessive cash stockpiles because the cash is considered “dead” inside a corporate structure and we investors could better deploy that cash in other investments.
Could we, really?
Ten years ago, the stock traded at $10.97, up roughly 52x.
Five years ago, the stock traded at $85.89, up roughly 7x.
Three years ago, the stock traded at $88.89, up roughly 6x.
One year ago, the stock traded at $351, up 50%.
Even with the cash imbedded in the stock, Apple has managed to return more than most investors could in alternative investments. How can I make that assertion? Because look at the return on the overall market over the same period of time. S&P has basically flat-lined over ten years, while Apple is up over 4,000%.
The Case for Apple to Keep its Cash:
First, Apple is an emerging growth stock, even today. Its growth still outpaces most stocks, despite its low valuation (P/E multiple). Growth stocks do not provide dividends because, in theory, growth stocks can use the cash for more growth. Apple is in the bird’s eye seat for identifying growth: Apple doesn’t just see growth; Apple creates growth trends.
Second, as an investor, I would rather that Apple invests its cash for me. Apple is frugal, purposeful and strategic in its M&A activities. It has utilized its cash to push its strategies forward. Since the beginning of 2010, Apple has purchased:
- Quattro Wireless: mobile advertising
- Intrinsity: Apple A5 system on chip
- Siri: the voice command software that propels the iPhone 4S
- Poly9: maps
- Polar Rose: face recognition in iPhoto
- IMSense: photography
- CS3: 3D imaging/mapping
- Anobit: flash
- Chomp: App Search
The sum total of the amount disclosed for these acquisitions is slightly over $1B, but the impact of these acquisitions is meaningful and obvious to Apple product users. This is an example of turning 1 into 10 or more by smartly deploying their capital.
Third, as an investor, I would like Apple to continue to use their cash in this prudent manner rather than succumb to investor pressure to make “big” acquisitionons. Suggestions for Apple acquisitions include NetFlix, SiriusXM, or Akami. But Apple’s success has been buying smaller companies to incorporate them as a piece of Apple’s larger strategy and vision, not to take on another company’s approach or strategy. Investors in Apple should have confidence in Apple’s visions as it has served them well so far. Using the cash to advance their own network or cloud, as users of iMessage have experienced, to invest in the next media of what we used to call “television” or to invest in furthering their “PC-less” ecosystem, enabling us to use iPhones and iPads without syncing to our computers makes the most sense.
Lastly, if anything, I would like Apple to split the stock. While there is absolutely no economic difference in owning 1 share of stock priced at $540, or 10 shares of the same stock at $54, the difference is psychological. Consider this: Apple trades at approximately $540 and is expected to earn $42.72 for the year ending September 2012. Investors consider this “expensive” because the stock is over $500 per share. However, many investors would consider Apple affordable if it were trading at $54 and earned $4.27 over the same period. The only difference is that in the second example, investors receive 10 shares for $540 versus today when investors only receive one share: but in both scenarios, investors earn an estimated $42.72 for that $540 investment.
The real way to determine if a stock is cheap or expensive is not on the absolute amount of the stock price, but on its valuation. Apple trades at less than 10x this year’s estimated earnings, less cash. And that is on a stock whose earnings estimates have increased 24% in the last three months.
Apple continues to be the cheapest growth stock despite its recent run-up. Investors should remain highly confident in Apple’s ability to manage its own cash effectively. Investors should keep in mind: Apple is not a computer company, nor a phone company, nor a tablet company. Apple leverages elegant software solutions into fabulously designed products to change how people behave doing the most common activities: creating, communicating and interacting with friends and media.
I continue to recommend the stock. It will only get more exciting with next week’s announcements.
