Not Enough, Apple


Apple (NAS: AAPL) announced its first dividend since 1995 yesterday. That's great news for shareholders, who are now entitled to some $10 billion of the company's cash every year. For perspective on how far and fast the company has grown, those who purchased Apple shares in 2003 will recoup their initial investment with every annual dividend payout.

But it isn't enough. Even with a share-repurchase program also announced yesterday, Apple is hardly making a dent in its bank account.

By the company's calculation, the dividend and share repurchases combined will cost $45 billion over the next three years. Yet according to analysts at Sterne Agee, Apple will generate $75 billion to $80 billion of free cash flow over the next year alone. At that rate, even with yesterday's announcement, Apple's cash hoard is likely to grow to $150 billion next year, and perhaps $250 billion by 2015. By then, Apple could fund its dividend and buybacks, buy New Zealand (literally), and still have one of the largest cash cushions in the world.

"Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business," said CFO Peter Oppenheimer. Understatement of the year.

Apple, in other words, hasn't solved what some see as its biggest (if not only) problem: what to do with its cash.

And a real problem it is. Apple earned an average return of 0.77% on its cash and cash equivalents last year. With inflation tracking at 3%, its cash is losing value in real (inflation-adjusted) terms at a rate of more than $2 billion per year. That's more than the company earned in annual profit as recently as 2006.

Some note that yesterday's announcement was just the opening salvo, and the quarterly dividend of $2.65 per share can and will be raised. But even if Apple doubles -- heck, triples -- its initial payout, the $100 billion cash hoard will continue to grow substantially. And with news of 3 million iPads sold on the opening weekend, to say nothing of the prospect of Apple TV on the horizon, current estimates of cash-flow generation may prove too pessimistic (though those can be famous last words).

Apple needs to do something else with its cash -- far bigger and more ambitious than yesterday's announcement.

That may eventually mean an acquisition. After paying its dividends, Apple can still afford to purchase nearly any technology or media company. There are a mere 85 companies in the world with a market cap above $80 billion, or more than Apple could reasonably acquire with cash. Fewer than 10 are even tangentially related to its business.

More likely is a massive one-time special dividend, as Microsoft (NAS: MSFT) issued in 2004. Back then, Microsoft sat on $60.6 billion of cash and parted with $33 billion of it in one fell swoop. The equivalent for Apple today would be cutting a check for about $55 billion, or around $50 a share.

In fairness, some of Apple's relative timidity no doubt stems from burdensome tax laws. Cash held in foreign subsidiaries -- about half, in the case of Apple -- is subject to repatriation taxes if brought back to the United States. That can total 35% minus a credit for foreign taxes already paid. Some analysts and companies are holding out for a repatriation holiday, as took place in 2004. Others, including myself, think repatriation taxes should be ended altogether, switching instead to a territorial system that taxes income only where it is earned, as nearly every other industrial nation does.

But there comes a point where citing repatriation taxes is no longer a valid excuse to deprive shareholders of cash. If there is no repatriation holiday, and a territorial tax system is not in the cards (both likely for the indefinite future), will multinationals like Apple never return cash held overseas? Truly, never? If so, then a company's foreign operations are literally good for nothing in shareholders' eyes. The bullet will have to be bitten eventually.

Great start, Apple. But it's not enough.

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At the time thisarticle was published Fool contributorMorgan Houselowns shares of Microsoft. Follow him on Twitter, where he goes by@TMFHousel.The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Microsoft and Apple and creating bull call spread positions in Microsoft and Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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