Warren Buffet recently told CNBC’s Squawk Box about a conversation that he had with Steve Jobs a few years ago regarding what Apple should do with all of the cash it had on hand. He gave him a couple of options, stock buybacks, dividends, acquisitions or “sitting with it.” Although Buffet says he advised Jobs to buyback stocks, the money was sat on, and still is. In its recent quarterly earnings report, the company is sitting on $97 billion in cash. What should Apple do with its money now?
Stock buybacks would have the company offer cash to its shareholders in exchange for a reduction in the number of outstanding shares. This means that the earnings per share (EPS) would increase while extracting value from the shareholders they purchased from. Considering that Apple has been neck-in-neck (on the winning side) with Exxon for being the most valuable company in the United States, this inflation in EPS may throw economics out of whack. I don’t think anyone can argue that Apple is ‘undervalued,” which is a main reason a company would buy back stocks. This does not seem like a good choice for the company.
Paying out dividends is highly unlikely for Apple considering the last time it did so was in 1995. The company is currently holding about $64 billion outside the United States right now, and bringing it back into the US would mean paying a 35% tax rate, which would affect the dividend distribution process in such a way that Apple will probably not want to follow that path.
Apple has been partaking in small-scale acquisitions throughout the last few decades, with the most recent being the acquisition in 2011 of Anobit, an Israeli microchip-manufacturing firm. Anobit cost the company $390 million. That is small potatoes compared to nearly $100 billion. While Apple could start buying up big businesses, it would have to deal with laws and regulations relating to monopolies if its assets got too big. Additionally, Apple’s carefully controlled image would be in jeopardy if the company started to incorporate other large businesses with its own. Imagine if Apple bought Dell. That would just look weird.
The current state of “sitting on it” seems like the best option for Apple at this time. However, at more than $450 per share, the company will have to start doing something with the money sooner or later. Maybe they could buy an island somewhere in the Pacific. Maybe they could buy Catalina Island and turn it into a tech amusement park for Apple-holics like me. I’d buy that ticket.