Apple aims to achieve net cash balance, hints at investments and M&A
Apple is looking to reduce its gigantic cash hoard to become "net cash neutral" over time, according to CFO Luca Maestri, suggesting the company is planning to mete out dividends, accelerate stock buybacks or perhaps increase mergers and acquisitions operations.
In an earnings conference call on Thursday, Maestri said Apple is looking to shrink its cash balance, which currently stands at $285 billion or $163 billion excluding debt, down to nothing. The strategy is in stark contrast with Apple's traditional financial model that saw the firm hoard cash overseas in anticipation of lower U.S. tax rates.
"We have now the flexibility to deploy this capital," Maestri said, adding that the process will be completed "over time because that amount is very large."
Last month, Apple announced plans to pump $350 billion into the U.S. over the next five years, an investment that will include the repatriation of overseas money. As a result, the company is expecting to pay $38 billion in taxes.
Maestri was cagey when asked what Apple plans to do with the $163 billion, but his answer hinted at potential increases to dividends and stock buybacks. The executive pointed to past quarters in which Apple funneled "effectively 100 percent" of free cash flow to shareholders, saying future plans will likely follow that approach.
While vague, the statement strongly suggests stock holders will benefit from existing programs. Tellingly, Maestri said Apple intends to "make the best decisions in the interest of our long term shareholders."
Elaborating on the matter in an interview with Financial Times, Maestri confirmed the capital allocation could include M&A, dividends and buybacks.
During today's conference call, CEO Tim Cook noted the allocation will bring cash and debt in equilibrium.
"What Luca's saying is not cash equals zero, he's saying there's an equal amount of cash and debt," Cook said.
Maestri said a more detailed overview of Apple's cash plans would be unveiled when the company reports March quarter results, likely in April.
In an earnings conference call on Thursday, Maestri said Apple is looking to shrink its cash balance, which currently stands at $285 billion or $163 billion excluding debt, down to nothing. The strategy is in stark contrast with Apple's traditional financial model that saw the firm hoard cash overseas in anticipation of lower U.S. tax rates.
"We have now the flexibility to deploy this capital," Maestri said, adding that the process will be completed "over time because that amount is very large."
Last month, Apple announced plans to pump $350 billion into the U.S. over the next five years, an investment that will include the repatriation of overseas money. As a result, the company is expecting to pay $38 billion in taxes.
Maestri was cagey when asked what Apple plans to do with the $163 billion, but his answer hinted at potential increases to dividends and stock buybacks. The executive pointed to past quarters in which Apple funneled "effectively 100 percent" of free cash flow to shareholders, saying future plans will likely follow that approach.
While vague, the statement strongly suggests stock holders will benefit from existing programs. Tellingly, Maestri said Apple intends to "make the best decisions in the interest of our long term shareholders."
Elaborating on the matter in an interview with Financial Times, Maestri confirmed the capital allocation could include M&A, dividends and buybacks.
During today's conference call, CEO Tim Cook noted the allocation will bring cash and debt in equilibrium.
"What Luca's saying is not cash equals zero, he's saying there's an equal amount of cash and debt," Cook said.
Maestri said a more detailed overview of Apple's cash plans would be unveiled when the company reports March quarter results, likely in April.
Comments
They’ve had some time to think this through.
On the face of it, it looks like they'll be wiping out existing debt with the "repatriated" cash.
Only a 9B market cap and you will own Ticketmaster also. Rebrand as Apple Tickets and link to icloud account....OR create Apple Entertainment and have this a part of it, along with music, TV, etc
just emailed Tim Cook/Apple
Looks like we'll have to settle for Apple's services division continuing to drink their own kool-aid, continuing to refuse to create a music app that has any functional social capabilities or halfway-decent sub-genre support, continue to create half-baked TV shows, obscure music documentaries that no one will watch, and release music sets that no one will listen to. (And yes, I am aware that Apple's services revenues are growing thanks to the app store).
When is enough enough.
It was the questioner who asked about acquisitions and Apple’s response was along the lines of ‘we’re always looking and have always had the ability so the new tax law does really change anything in that regard’.
Keep Watson and Cloud, divest the rest.
But yes, you’ve got to buy the whole thing first before selling off the pieces you don’t want.
An additional, and I think significant, value of share repurchases and dividend payments comes from removing unproductive excess cash from the balance sheet. Lets look at Apple, with about a $900 billion market cap (after the earnings pop) and about $165 billon of cash and equivalents on the books, net of debt. A dollar invested in Apple represents about 80 cents invested in the actual operating business, which is where the profits come from, and about 20 cents invested to buy a bit of that cash pile, earning about 1%. Arguably a less-than-ideal allocation of each invested dollar.
So a smart investor wants that cash removed from the books, which would either reduce the market cap of the company or, if the cash isn't being valued at even 1x its value, which could be argued is the case with Apple, removing that cash would leave the market cap where it is, which would then imply a higher earnings multiple against the productive operating side of the business, while also taking shares off the market, which would increase earnings per share going forward.
And a higher earnings multiple means that as earnings grow in the future, the stock will climb faster. Carl Icahn might have had all of these effects in mind - more efficient allocation of investor's dollars, increase in earnings multiple against operating business, and reduction in shares netting an increase in earnings per remaining share - when he approached Tim Cook years ago. Pity we didn’t have tax reform at that time, when the share price was significantly lower.
I cracked up laughing when I heard this on the call. Maybe it was the way he said it. But I was also thinking that, yes, it might also take me a while to spend approx. $165 billion cash.