Seed, manure, reap and harvest, and presto! you have cash. Well, that's the essence of a farm. What if the farm is of cash itself? What if all we can see is cash everywhere in the farm? Sounds a bit exaggerated, let's follow the story, nevertheless.
The cash farm
Apple is due to file its annual results soon, and all I can see thus far is cash everywhere. In 2002 Apple had cash of $4.34 b; as of June 2014 it was $164.49 b.
What I ponder now is will Apple be able to continue harvesting this farm. I have no answer to this, but, from its low point in 1999 to its high point in the recent times, its story has been worth following.
Although it has spent $40 b in aggregate since 2002 on capex and acquisitions, it was also helped by positive changes in non-cash working capital and of course, depreciation. The result has been a very low reinvestment rate. The recipe is simple: high operating profits, low reinvestment, and hence, lots of cash. Its long term reinvestment rate has been less than 4%.
Because of its large cash, the operating capital employed in its core business is actually negative. Therefore, return on capital is not reasonable.
After massive success of iPhone, the company has not been able to find ways to deploy its cash. Clearly, investment alternatives are not visible now. After all, 164 b is enormous.
The ongoing buyback program requires $60 b more of stock repurchases by December 2015. It has also started paying out dividends. Yet, the cash pile is going up. Since a significant portion of its cash is tied up and trapped outside of the US, Apple has been tapping debt for buybacks and dividends. So, cash going out is also offset by cash coming in.
The market value of its equity currently stands at $596 b of which, $164 b is cash. iPhone, iPad, iTunes, and Mac comprise operating business. The stock is trading at $99.62 per share.
With certain assumptions on its business (revenues grow to $280 b in 2024, operating margin decreases to 25% and return on capital to 15% gradually by that time, reinvestment rate remains lower without major innovations), Apple stock does not appear to be in a bubble zone (does it?).
However, in the absence of any triggering event (such as new product or acquisition), its stock will likely trade at reasonable levels.
Because of its large cash, the operating capital employed in its core business is actually negative. Therefore, return on capital is not reasonable.
After massive success of iPhone, the company has not been able to find ways to deploy its cash. Clearly, investment alternatives are not visible now. After all, 164 b is enormous.
The ongoing buyback program requires $60 b more of stock repurchases by December 2015. It has also started paying out dividends. Yet, the cash pile is going up. Since a significant portion of its cash is tied up and trapped outside of the US, Apple has been tapping debt for buybacks and dividends. So, cash going out is also offset by cash coming in.
The market value of its equity currently stands at $596 b of which, $164 b is cash. iPhone, iPad, iTunes, and Mac comprise operating business. The stock is trading at $99.62 per share.
With certain assumptions on its business (revenues grow to $280 b in 2024, operating margin decreases to 25% and return on capital to 15% gradually by that time, reinvestment rate remains lower without major innovations), Apple stock does not appear to be in a bubble zone (does it?).
However, in the absence of any triggering event (such as new product or acquisition), its stock will likely trade at reasonable levels.
The options
Assuming that its operating business is kept alive until the Apple frenzy fades, i.e. no major innovations anticipated, I fancifully list some of the action points for the Apple managers:
Assuming that its operating business is kept alive until the Apple frenzy fades, i.e. no major innovations anticipated, I fancifully list some of the action points for the Apple managers:
- Investment policy: Very low reinvestment rate as no new good projects are envisaged;
- Financing policy: No changes in the capital structure; no significant debt increase;
- Consistent cash dividends in line with earnings;
- No significant stock buybacks;
- Use current and future cash for creating an investment operation.
Investment operation
Apple should consider investing its current and future cash in an investment operation. Whole or a portion of some of the start-up, growing and mature companies can be bought at prices considered reasonable. These should become good projects for Apple eventually. Here's an illustrative list:
With just $65.50 b Apple can have ownership in different technology businesses. It can also consider investing in non-technology (growing) businesses, and also in mature businesses to fortify its investment portfolio.
There is no shame in admitting that it has lost out on core business investment opportunities. That fact is actually conveyed without telling.
