Apple CEO Tim Cook (Photo credit: deerkoski)
On the heels of a severe recession, the philosophy of corporate executives when it comes to cash is similar to the view baseball teams take on pitching: you can never have enough.
Perhaps no company takes that philosophy further than Apple, which has piled up some $137 billion in cash and drawn the focus of hedge fund manager David Einhorn, who made headlines with his prescription to unlock value at the iPhone-maker last week. (See "Apple And The Breaking Bad Problem Of Too Much Cash.")
“The debate over cash is one companies and shareholders have frequently,” says Nicholas Colas, chief investment strategist at ConvergEx. Any large company with a lot of cash – and considering the S&P 500 is sitting on some $1.5 trillion at present there are plenty – is a potential target he adds.
“It’s Apple today, it will be someone else tomorrow.”
Executives like Apple’s Tim Cook and others that face investor ire over their substantial cash holdings have a number of cards to play though, Colas says.
For one thing, they can point to the Federal Reserve. Ben Bernanke & Co. are still pumping unprecedented levels of monetary stimulus into the U.S. economy. Management can simply ask an activist like Einhorn “the country’s central bank doesn’t think we are really out of the crisis, why do you?” Colas says.
Another talking point for Cook and his team: look at our competitors. Colas notes that Apple is hardly the only tech heavyweight building up a considerable cash balance. “Only the company with MORE cash than its peers will be able to leverage that advantage, and only after everyone else has burned through the contents of their piggy banks,” he writes, drawing a comparison to a recent example in the auto industry.
While General Motors and Chrysler were forced to file for bankruptcy in 2009, Ford Motor managed to avoid Chapter 11. Now that was largely thanks to some fortuitously-timed borrowing in the years prior, but the point remains that when things get dicey the player with the most liquidity is typically in better shape.
The next potential clue to Apple’s cash strategy may come Tuesday morning, when Tim Cook is scheduled to speak at a Goldman Sachs technology conference. (The appearance was moved up to 7:15 a.m. Pacific time, likely due to the fact that Cook will be a guest in Michelle Obama's box at President Obama's State of the Union address Tuesday night in Washington. Click here for a live webcast of Cook's presentation.)
RBC analyst Amit Daryanani suggested a potential timeline for a dividend increase in a note last week. The company’s annual shareholder meeting is February 27, a date worth circling on the calendar as the potential jumping off point for a change to the company’s capital allocation policy in March, according to Daryanani.
By using 15% of its current cash balance, or about $20 billion, Apple could double its annual dividend and potentially give the stock a lift, the analyst says.
Shares of Apple were negligibly lower in pre-market trading Tuesday morning at $479.75. The stock is off 9.8% in 2013 and more than 30% below its September high.
Einhorn's Greenlight is also suing the company over a proposal that would restrict the board's ability to issue preferred shares. The company maintains the policy would merely require shareholders to vote on such issuance, and a judge agreed to accelerate the timing of the suit given its potential impact on the annual meeting, according to Reuters. Oral arguments are now set for Feb. 19.
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