A Countdown to Apple’s Cash Conference Call
About two hours from now, one of the great business questions that has persisted for a little less than a decade is going to be answered: What will Apple do with all the cash it has accrued on its balance sheet? Apple CFO Peter Oppenheimer will hold a special conference call to announce the company’s intentions.
Update: Apple didn’t wait for the conference call to release its news. It has just announced plans to pay a quarterly dividend of $2.65 a share and buy back $10 billion worth of shares.
The question has lingered for a long time. At last count, when Apple last reported quarterly earnings, the figure was a staggering $97.6 billion. At the close of that period, which happened to coincide with Apple’s all-important holiday season, the company reported that its cash pile grew by $16 billion, in a single quarter.
That is more cash than the $12 billion it had on hand in 2007, which is roughly when the persistent questions about paying a dividend, buying back shares, making large acquisitions, or doing something else with the cash started knocking around in the minds of investors and analysts. At that time, Apple had reached a point where it was growing its cash hoard by a healthy $1 billion per quarter, an amount that seems quaint now.
Apple’s cash-generating power is scarcely imaginable. In the company’s most recent four quarters, analyst Shaw Wu of Sterne Agee estimates that Apple’s free cash flow was $45.3 billion. But as iPhone, iPad and Mac sales grow, it is on track to nearly double that figure in the next four quarters, to somewhere between $75 billion and $80 billion.
The cash — technically the figure most widely used is the sum of Apple’s cash on hand, its short-term investments that can be quickly converted into cash, and its long-term investments — has a lot to do with the reason that Apple’s share price has risen so high so fast. If, hypothetically, Apple were to shut down and liquidate tomorrow, everyone who owns shares would be entitled to about $104 for every share they own, and that would be before accounting for the sale of any assets.
It has always been used as a strategic hedge. Apple has the strongest supply-chain planning in the computer and electronics industry because it can show up, cash in hand, and buy up a fixed percentage of a supplier’s capacity. In 2005, this proved strategically invaluable when it launched the iPod nano. By buying up a large percentage of manufacturing capacity of flash-chip manufacturers, it guaranteed its supply of a critical component known for regular shortages, and forced its competitors to wait in line when the shortages inevitably arrived. Soon, Apple was the only music-player maker worth talking about, as most others faded into market obscurity or ceased to exist. Yet, as of Dec. 31, only $2.7 billion was committed to these “long-term supply agreements” that Apple concludes with companies that supply it with certain strategically important parts.
The consensus appears to be that Apple will pay some sort of dividend. Analysts seem to want a dividend of about 2.5 percent. At that rate, says ISI analyst Brian Marshall in a note to clients issued Sunday, Apple would pay a higher dividend yield than Hewlett-Packard, at 2 percent; Cisco Systems, at 1.6 percent; and even IBM, at 1.5 percent.
At current prices, a 2.5 percent annual dividend would put $14.65 per share in the pockets of Apple shareholders. It would also cost Apple between $12 billion and $14 billion a year, but given its expected free cash flow for the coming year, it can easily afford it.
A dividend would also spur a new round of buying of the stock, and probably have the effect of driving the share price higher, as mutual funds and exchange-traded funds (ETFs) pile in to add to their Apple positions, thus spurring other investors to keep buying as well. One wonders where — if it happens — this all leads. Apple is the largest company in the world, and every day brings some new, uncharted territory.
Already, shareholders are anticipating good news. Apple shares are up by nearly $22 to $606.87 a share in premarket trading this morning, in anticipation of a dividend. The $600 threshold, barely cracked last week with a few trades at $600.01, will in all likelihood be smashed to bits today, once the markets open for regular trading.
A return to paying a dividend would also close the loop on an important thread in the now decades-long epic that has made the Apple story one of the greatest narratives in the history of business. In November of 1995, during its crisis years, when cash was so short that Apple struggled to keep its doors open, it payed its last dividend of 3 cents a share at a time when on a split-adjusted basis, the shares were trading at less than $10.
The story of what has happened since then is well-known. And it’s not over yet.