This Is What Apple Earns on Its Cash


Apple's cash problem has been the talk of the town lately. Just this week, two prominent fund managers were out discussing ways that Apple could improve its capital allocation strategy by giving more of its money mountain back to investors.

Bill Miller suggested Apple return all future free cash flow to investors, which would be a substantial increase from current payouts. David Einhorn thinks issuing a share class of perpetual preferreds that yield 4% is the way to go. Shares put up meaningful gains on both occasions as investors contemplated the better uses of Apple's cash.

As far as how all those dollars do right now, we might as well look at what Apple earns on those investments.

Hiding in plain sight
Apple discloses what it earns on its cash investments in its SEC filings. Some of these returns (more on this later) are included on its income statement within its other income and expense, or OI&E, line item. The company's OI&E has been rising over the past couple of years primarily due to increased interest and dividend income on its cash investments.

These gains are partially offset by increased premium expenses on some of its derivative contracts that it uses to hedge foreign exchange movements and other cash flows.


FY 2011

FY 2012

Q1 2013

Total OI&E

$415 million

$522 million

$462 million

Realized gains on cash investments

$110 million

$183 million

Not significant

Unrealized gains on cash investments at end of period

$264 million

$1.05 billion

$951 million

Unrealized losses on cash investments at end of period

($158 million)

($20 million)

($87 million)

Total cash at end of period

$81.6 billion

$121.3 billion

$137.1 billion

Source: 10-K and 10-Q filings. FY = fiscal year. Total cash includes short-term and long-term marketable securities.

I know some of you mathematicians out there are preparing to whip out your trusty calculators in order to calculate what percentage rate of return those figures represent. Let me stop you right there.

Not enough info
For any investment portfolio -- be it your $2,000 IRA or Apple's $137.1 billion cash pile -- with regular cash inflows and outflows, the most appropriate measure of return is a time-weighted rate of return. In order to calculate this figure though, you need to know the timing and amount of all inflows and outflows during the period. Since we mere mortals (i.e., public investors) are not privy to this information, we simply can't calculate Apple's time-weighted rate of return even though we know how much it made it absolute dollar terms.

We can look at the cash flow statement to see how much cash it uses to purchase marketable securities ($37.2 billion in fiscal Q1) and its proceeds from sales and maturities ($26.5 billion in fiscal Q1), but those aggregate figures for the entire period still aren't enough.

A quick accounting refresher
Apple classifies its marketable securities as available-for-sale. This means that they are held on the balance sheet at fair value and subsequent unrealized gains and losses bypass the income statement and get recorded in other comprehensive income. Only realized gains and losses are shown on the income statement. This is why the unrealized figures in the table above are not included in the OI&E total.

The other two ways that companies can classify these types of securities (held-to-maturity or trading securities) entail different accounting methods.

A numbers game
Another negative side effect of having all of this cash is that it makes management look less effective, which is why Apple has received criticism over its capital allocation strategy lately. Many of the ratios that investors use to measure management effectiveness are based on the balance sheet, which includes an inordinate amount of cash for Apple. Return on assets and return on equity in particular suffer since Apple's ballooning cash balance increases the denominator in each ratio.

In its statement responding to David Einhorn yesterday, Apple admitted that early last year it gathered more cash than it needed for operations. A year ago, its cash position was $97.6 billion, and it's added nearly $40 billion to its coffers over the past 12months. Let's say that Apple only "needs" $100 billion to run the ship, and had aggressively returned anything beyond that over the past year.

Just to illustrate the difference it could make, this is how return on equity would have differed over the past year if Apple had theoretically put a maximum of $100 billion on its cash and returned everything in excess of that figure.

Sources: SEC filings and author's calculations.

This was just to prove a point, since in actuality it's not realistic to think that Apple would have returned nearly $40 billion to shareholders over the course of one year (its current plan is to return $45 billion over three years). That being said, the company can certainly afford to give more back and in the process will improve one of the most important metrics that investors look at.

There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

The article This Is What Apple Earns on Its Cash originally appeared on

Fool contributor Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.