Apple: The Crucial $54 Billion Question

With $54 billion in net cash left, should Apple continue its aggressive share buyback program, increase its dividend, invest back into the business, or simply save the money?

  • What Apple chooses to do with its dwindling cash pile could matter quite a bit for investors.
  • Share repurchases have played a key role in supporting the stock over the last decade, but Apple should rethink the strategy.
  • My favorite approach is a combination of investing in new products or services and saving what is left for future opportunities.

Apple‘s (AAPL) – Get Free Reportthe cash pile has been dwindling, but it is still massive by nearly any other company’s standards. The Cupertino-based tech giant reported a net cash position (ie, cash and equivalents net of financial debt) of $54 billion in the most recent quarter, down a noticeable 32% YOY as Apple continues to steer its cash toward a net-neutral position .

Considering Apple’s relatively low projected growth in the next few years — revenues and EPS are expected to rise by 4% and 5% annually through fiscal 2025, respectively — I think that what Apple chooses to do with its cash could matter quite a bit for investors .

Below, I debate potential cash deployment strategies and pick my favorite approach.

Figure 1:Apple: The Crucial $54 Billion Question


Read also: Apple Stock Chart Analysis: Is $200 Next?

Continue To Repurchase Shares

Under the leadership of CEO Tim Cook, Apple has become a share buyback machine. In the past three years, the company spent an annualized average of $82.6 billion in cash to repurchase its stock.

The chart below shows the trajectory of net cash since fiscal 2013 (blue line), shortly after the passing of Steve Jobs and the CEO transition, compared to what Apple’s liquidity would have been today if the company had chosen to save the cash that it spent on share repurchases (red line).

Figure 2: Apple’s net cash analysis.

DM Martins Research

I suspect that Apple’s aggressive, ten-year-long share repurchase program helped propel the stock price and valuations higher. This could continue to be the case going forward. But, if so, the effect may be more psychological than quantifiable.

Apple currently trades at about $150 apiece. The company’s $54 billion in net cash today would be enough to retire only around 360 million shares, or about 2% of the float.

Keep in mind that this process would likely take place over more than a year, which means that the anti-dilutive effect of the buybacks would be next to negligible in the foreseeable future.

Increase The Dividend

Another possible use of Apple’s cash surplus would be to increase the dividend. Today, AAPL yields a very modest 0.6%, a rate that is about seven times smaller than the yield on the ten-year US treasury note. Apple is currently not a good pick for investors in search of a steady income stream.

Using the $54 billion in net cash to bump the dividend payments would be problematic in at least one way. Since companies rarely choose to reduce dividend payments in the absence of financial distress, any increase would be “sticky” in perpetuity. Apple, therefore, would have to keep paying its shareholders long after its net cash pile was depleted.

Even so, there is very little that Apple could do to its dividend today to make much of a difference. For example, doubling the yield to a still unimpressive 1.2% at a share price of $150 would require an additional annual cash disbursement of around $15 billion.

In only around three years, Apple’s current net cash balance would have been used up.

Invest Back In The Business

A return-on-investment analysis helps to support the case for plowing money back into the business.

The chart below, provided by our partner Stock Rover, shows that Apple’s ROIC has been astonishing at over 20% at all times over the past decade and at nearly 53% currently. None of the FAAMG peers listed below come even close.

Figure 3: Apple’s ROIC vs. Big Tech peers.

Stock Rover

Because Apple has historically been able to do so much with so little (that is, very high profits relative to capital investments), it might make the most sense for it to deploy its cash in-house and try to grow its business more aggressively.

The problem is that ROIC or any other return metric is backward looking. Maybe Apple has already picked the low-hanging fruit — pun intended — and new initiatives might be much less appealing. Being heavily involved in the increasingly competitive autonomous/electric vehicle space comes to mind, considering Tesla‘s (TSLA) – Get Free Reportfairly low EBITDA margin of 20% to 25%.

That said, I believe that using spare cash to invest back in the company would create more value to Apple shareholders than returning it via stock buybacks or increased dividends.

Should Apple Just Save The Money?

The final cash deployment alternative on my list is to simply save it. Not long ago, when short-term interest rates hovered around zero, doing so made little sense. Today, the story is different.

According to Apple’s most recent 10-Q, nearly 90% of the company’s cash equivalents are invested in interest-earning marketable securities. More than half of the total sits in corporate and asset-backed securities with maturities longer than one year that should yield more than treasuries.

If I assume an annual return of 5%, I estimate that Apple can add about $2 billion per year to its after-tax earnings by saving its $54 billion rather than deploying it elsewhere. On a per-share basis, the accretion to EPS would be around 13 cents.

Clearly, the impact to the bottom line in this case would be small, but arguably no less relevant to value creation than continuing to buy back shares or increase the dividend. In addition, having a bit extra cash in the coffer may not be a bad idea ahead of what could prove to be a challenging 2023-2024 for the global economy.

The Best Use Of Apple’s Cash

As an Apple bull, I understand the importance that share repurchases have played in supporting the share price over the past decade. But I believe it is time for Apple to start considering alternative uses for the shrinking cash pile that it has on the balance sheet.

In my view, creating organic growth through initiatives that include new product and service launches would be ideal. Apple’s brand value and customer loyalty are strong, and the company should take advantage of both to diversify its business model further away from the iPhone.

In the absence of enough high-margin initiatives, I would favor simply keeping the cash for the moment and collecting the interest payments until a better opportunity surfaces.

Ask Twitter

Apple has $54 billion left in cash net of debt, down from well over $100 billion some five years ago. If you were the CEO, what would you do with that remaining money?

(Disclaimer: this is not investment advice. The author may be long one or more stocks mentioned in this report. The article may contain affiliate links, but these partnerships do not influence editorial content. The author may use AI tools, including OpenAI’s ChatGPT, to create and summarize some of the article’s content. Thanks for supporting the Apple Maven.)

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Naveen Kumar

Friendly communicator. Music maven. Explorer. Pop culture trailblazer. Social media practitioner.

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