Apple Has No Choice


Even in the land of the free, sometimes you still don't have a choice.

Apple's annual shareholder meeting takes place Wednesday in Cupertino. Just days before the meeting, David Einhorn was able to score a symbolic victory in his legal battle with the Mac maker and Apple is being forced to remove the vote over "Prop 2" from its proxy as a result, since the proposal bundled three different amendments to Apple's corporate charter that were intended to improve corporate governance.

The larger issue at the heart of the dispute was Apple's swelling cash balance, which has grown to absurd levels of $137.1 billion -- larger than the entire market caps of other tech and telecommunications giants like Intel,, Qualcomm, or Verizon Communications.

As the iMoney mountain grows, so does investor discontent, since that cash isn't doing a lot of good idling on the balance sheet. In fact, quite the contrary is true. The inflated asset and equity values on the balance sheet are a drag on several financial metrics that investors carefully track, such as return on equity.

We have too much money
The problem that Apple is running into is simply that it makes too much money and doesn't give enough back to its shareholders, relatively speaking. Apple has now explicitly said that it reached a point "early last year" that it had more cash than it needed to fund operations and maintain strategic flexibility. That was $40 billion ago.

That's precisely why Tim Cook made the move to re-initiate Apple's dividend after a 17-year hiatus and institute a share repurchase program to offset equity dilution related to share-based compensation. However, even as the $45 billion that Apple plans on returning to shareholders ranks high in absolute dollars, Apple's sheer cash-generating capabilities make that figure seem paltry.

Just look at the sliver of cash that Apple has given back so far.

Source: SEC filings. Calendar quarters shown. Cash returned includes dividends and buybacks.

This chart doesn't include the roughly $3 billion that Apple has returned so far in 2013 ($2.5 billion in dividends and $500 million in buybacks in the first quarter). That brings the total cash returned thus far up to $10 billion, nearly a year after the programs were initiated.

We make too much money
Apple's cash flow is nothing short of astounding at this point. Both operating cash flow and free cash flow in its fiscal first quarter alone were greater than all of fiscal 2010.

Source: SEC filings. Fiscal periods shown.

At the rate at which Apple is collecting cash relative to the rate at which it's giving back to shareholders, Apple simply has no choice but to increase its payout. What form this takes remains to be seen -- be it an increased yield on the common shares, a large special one-time dividend, a new class of perpetual preferreds like what Einhorn proposes, an increased buyback authorization, or some sort of combination of all of the above.

We can't do nothing
The only thing that Apple can't do is nothing, since it should be painfully obvious that an investor revolt is happening as we speak.

Not only are growth investors dumping their stakes as they question where future iPhone growth will come from, but also Apple's yield isn't generous enough to attract value investors en masse. Most of those types of investors still prefer the comfortable 4.4% and 3.3% yields of Intel and Microsoft, respectively, despite their questionable growth prospects.

While Einhorn's frivolous lawsuit is certainly a distraction and arguably part of a broader ploy to catalyze action, it serves as evidence that the status quo of conservative payouts and cash hoarding is no longer acceptable.

Apple certainly faces some challenges with how to increase its dividend, as most of that money is overseas, but rest assured it will start giving more back to shareholders. It has to.

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 your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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Fool contributor Evan Niu, CFA, owns shares of Apple, Verizon Communications, and Qualcomm. The Motley Fool recommends, Apple, and Intel. The Motley Fool owns shares of, Apple, Intel, Microsoft, and Qualcomm. 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.

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