Apple CEO Tim Cook Faces a $98 Billion Problem

Tim Cook
Tim Cook

Apple CEO Tim Cook has a problem, a $98 billion problem.

Just 18 months ago, Apple's $46 billion mountain of cash - while huge by most standards - attracted only muted complaints from investors, who did call for a dividend or share buyback, but were mostly happy with the meteoric rise in the stock price.

Tim
Tim Cook

But with the growing cash balance now a much bigger overhang on the stock, widely considered to be undervalued, investors are clamoring more vocally for Cook to put the money to work.

No one could have foreseen just how quickly that warchest would grow. Indeed, some analysts estimated Apple's cash holdings would increase to $65 billion at the end of 2011. That it has swelled nearly 50 percent above even those lofty projections is nothing short of awesome.

Apple now has about $104 in cash per share.

But to paraphrase rapper P. Diddy, with more money comes more problems. Apple's runaway success presents Cook with his first real public test as chief executive officer - figuring out what to do with the money.

Apple's cash balance is now a quarter of its $415 billion market capitalization and roughly equals California's 2012-2013 state budget. And even though $64 billion of Apple's cash is overseas - meaning it will have to pay a hefty tax to bring it into the United States - calls for a dividend on Wall Street grew louder after the company said on Tuesday it was in active discussions internally on what to do with the money.

Wall Street is strongly in favor of Apple returning the money to shareholders through buybacks or dividends, even if it is only a one-time deal. But the ultra-conservative company, which typically ignores Wall Street, gave no clues about that during its earnings call on Tuesday.

They are clearly trying to signal that they are not ignoring the issue, said Michael Holt, an analyst with Morningstar. It doesn't mean that a decision is imminent.

Others, however, are convinced a dividend will be paid this year.

With Apple stating that it is 'actively' pursuing its options with regards to its cash balance, we believe the commentary may be setting itself up for a cash dividend in FY12, Ticonderoga Securities analyst Brian White said, raising his target on the stock to $666.

Katy Huberty, an analyst with Morgan Stanley, echoed White's view, saying: Apple appears committed to making a decision on cash return in the near-term and we continue to believe a dividend makes the most sense.

Some big technology companies have started paying a dividend to help allay investor concerns about slowing growth by returning part of their ample cash holdings. Cisco Systems Inc (CSCO.O) began paying a dividend last year, while Microsoft Corp (MSFT.O) started in 2003.

FAR TOO MUCH MONEY

Apple stock gained 25 percent in 2011, adding about $77 billion to its market cap and it touched an all-time high of $454.45 on Wednesday. Some continue to bank on a share-price rise to as high as $700.

The company's core business is throwing off massive amounts of cash every quarter - Apple recorded a $16 billion increase in cash sequentially - in part because of its reluctance to pay a dividend or buy back stock and its limited acquisition history.

The company earned a mere 0.77 percent on its cash and investments in fiscal 2011, mostly due to its preference for safe, but low-yielding U.S. Treasury and agency debt.

This is a tad higher than the 0.75 percent it earned in fiscal 2010, but down from 1.43 percent in fiscal 2009, 3.44 percent in 2008 and 5.27 percent in 2007.

Fiscal prudence has long been part of Apple's mantra and the Cupertino, California-based company runs a tight ship with total revenue rising 66 percent in fiscal 2011, but operating expenses rising only 37 percent.

For now, Apple's Chief Financial Officer, Peter Oppenheimer, has veered away from his usual script, which was to tell Wall Street that Apple has always had internal discussions on the best use of its cash, with capital preservation being key.

He characterized these discussion as active on Tuesday.

We recognize that the cash is growing for all the right reasons, Oppenheimer said, but added he had nothing to announce. In the meantime, we're not letting it burn a hole in our pockets.

Oppenheimer also suggested that Apple might invest in its supply chain or make acquisitions. But Apple has typically preferred to acquire small companies, which has had little or no material impact on its results so far.

Apple's major expense last year was paying the lion's share to acquire - along with Microsoft and a few other companies - the patent portfolio of bankrupt telecommunications company Nortel for $4.5 billion.

Apple said it spent $4.3 billion in fiscal 2011 to acquire property, plant and equipment, $3.2 billion in acquisition of intangible assets and $244 million in payments made in connection with business acquisitions, according to its annual regulatory filing.

That is in sharp contrast to rivals such as Google Inc (GOOG.O), which is acquiring Motorola Mobility for $12.5 billion in cash, and which completed 54 acquisitions during the first nine months of last year alone. The company's $44.6 billion warchest of cash and investments at the end of December was far lower than Apple's.

Google has also resisted pressure to announce a dividend or buy back stock.

Apple may do the same in the next few months, said Michael Walkley, an analyst with Canaccord Genuity.

We believe Apple is likely to announce a dividend during 2012, potentially next quarter when crossing $100 billion in cash and cash equivalents, Walkley said. We view this as very bullish for investors, as we believe a new group of investors seeking dividends would invest in Apple and drive shares higher.

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