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2012-03-15 11:37:59
The tech giant should give cash back to shareholders
Mar 10th 2012 | SAN FRANCISCO | from the print edition
NOT long after Steve Jobs died last year, wags eulogised the Apple co-founder
with a joke: Ten years ago we had Steve Jobs, Bob Hope and Johnny Cash. Now we
have no jobs, no hope and no cash. Apple may no longer have Jobs, but it fills
investors with hope and is brimming with cash. Its market capitalisation
recently passed $500 billion, and it has a whopping $100 billion or so of cash
on its balance-sheet.
That mountain of money is about to get higher. Apple aficionados are poised to
snap up the new gadgets that the company unveiled on March 7th. These include a
new iPad, the latest in the firm s wildly popular range of tablet computers,
and a revamped Apple TV device.
If the new iPad, which boasts a super-sharp screen and lightning-fast
connectivity, wins friendly reviews, it will give a big boost to Tim Cook, Jobs
s handpicked successor. But the extra cash it delivers will also increase
pressure on Apple s boss and board to explain what they plan to do with the
company s embarrassment of riches. Last month Mr Cook admitted that the firm
has more cash than it needs for its operations. It s a nice problem to have.
The obvious solution would be to give cash back to shareholders, either via
dividends or share buybacks. This is a surprisingly sensitive subject. Mr Jobs
was obsessed with hoarding cash, not least because of Apple s near-bankruptcy
in the mid-1990s. Returning money to shareholders would mark a big departure
from the revered founder s philosophy. Another reason Mr Cook will want to
tread carefully is that some pundits see a tech firm s decision to start paying
dividends as a signal that its glory days are behind it. One oft-cited example
is Microsoft, whose growth slowed after it began returning cash to shareholders
in 2003.
Apple is unlikely to suffer a similar fate. Demand for its iGizmos seems
insatiable. That is why it needs to come up with ways to invest more of its
cash sensibly. Tim Bajarin of Creative Strategies, a consulting firm, reckons
Apple could ramp up its forward purchases of components and set up its own
semiconductor factories, to give it a tighter grip on a critical link in its
supply chain. It could open more physical stores though their sales would only
add to its cash pile. And it may have to fork out more on lawyers fees to
fight patent lawsuits and deal with other problems, including allegations that
it colluded with publishers to fix the price of digital books.
On the acquisition front, the firm has long shunned megadeals, preferring to
swallow smaller firms with technology and people it covets. That policy is
unlikely to change, though Apple may well accelerate its deal-making tempo.
Among its likely targets are firms that offer video and other entertainment
content, and others with data that could enhance services such as Siri, its
virtual personal assistant.
None of this would put much of a dent in $100 billion. So Apple will probably
start handing cash back to shareholders later this year. Working out how to do
so will take time, not least because the firm holds much of its money outside
America in order to avoid hefty US corporate-tax rates.
Some Apple fans fret that if the company decides to pay regular dividends, it
could end up regretting it. Apple needs to watch out for dividend addicts,
says Aswath Damodaran, a finance professor at New York University who owns
Apple stock. Such shareholders, he adds, will be obsessed with extracting as
much cash as possible from Apple rather than with its mission of making
mind-blowing products. Perhaps. But the point of shares is that they confer
ownership. They are valuable only because shareholders expect and are entitled
to a share of profits. Apple may have trouble finding a good use for its cash,
but its shareholders will not.
from the print edition | Business