Apple has $97.6 billion in cash and investments

At the annual Apple shareholder meeting it was confirmed that the company had over $97 billion of cash and investments. When asked what they planned to do with it Apple CEO Tim Cook said they “have been thinking about this very deeply.” Speculation of how the company will deploy the cash is rampant. Will they institute a dividend? Buy back shares? 

that’s a complicated way of saying: Apple is a successful company. Ok, major understatement there. Right now, Apple is probably the most profitable company on Earth. In terms of market capitalization it is the largest company around. In the last twelve months the price of Apple’s stock has gone from around $350 per share to over $500. (As of Friday 2/24/12 it was $522!)

When a company is successful they generate profits. A lot of them. Apple shareholders at the meeting are asking CEO Tim Cook and the board of directors, “How are you going to give those profits to us?” There are 3 general methods for a company to “return value” to their investors. 1) Pay a dividend. This is a direct payment to shareholders. It can be a one time payment or a regular distribution. 2) Buy back company shares. The company will buy shares on the open market and put them into their vault. This has the effect of reducing the float and should cause the price of the stock to go up. 3) Reinvest the money in the company. This could mean buying new machinery or hiring more employees. Or something grander like, buying out a competitor or a related business. If the investments do well the company grows larger, generates more profits and the price of the stock continues to go up.

For the last while (well since 1995, the last time Apple paid a dividend) Apple has firmly belonged in category number 3. They have used the revenue they made to develop new products like iPod, iPhone, and iPad. And the next big thing could be AppleTV which currently is a set-top box, but might morph into another piece of hardware every hip person needs to own. This strategy of holding onto their profits, developing new products and rolling them out to great success has been a winner. The stock price definitely reflects that. That being said, it is not easy to come up with homerun after homerun. At some point Apple will say, we have innovated enough, we have invented enough, we are just going to focus on the business we currently do. When they reach this point, they will need to give the cash on their balance sheet to the investors through the other categories. Probably both of them.

Why wouldn’t Apple want to pay a dividend now? It signals to investors that the board and management no longer expect the explosive growth the company has enjoyed to continue. They are saying, “we expect profits to stabilize and remain steady.” This might alienate those investors who are looking for stocks that will go up in value quickly. On the other hand, instituting a dividend will bring in a whole new class of investor. Those who are seeking regular income in the form of dividend checks. In the short run, Apple announcing that they will pay a dividend should have a positive effect on the stock. (NOTE: some analysts might argue this is already accounted for in the value of the stock as all markets are “forward looking.”)

What will Apple do? My gut tells me Apple will be paying a dividend by Jan 2013. Almost $100 billion of cash is just too much money. It represents more than $100 of cash per OUTSTANDING share. Trust me when I say this is a lot. There is no realistic way the company could use all that money. So they might as well distribute it to the shareholders.