Executives at large-cap U.S. technology companies must have read a lot of Scrooge McDuck comic books when they were kids. The piles of cash (and equivalent securities) that they have amassed as corporate helmsmen are truly a sight to behold.
Indeed, it could be said their money bins are to corporate balance sheets what the Himalayan Mountains are to terra firma. For example, Intel Corp. reported over $20-billion (U.S) as of its latest quarter, while Google Inc. had more than $30-billion (U.S.).
Sitting on top of Mount Everest is Apple Inc. Its $60-billion (U.S.) is short of Mr. McDuck's net worth of "one multiplujillion, nine obsquatumatillion [and change]rdquo; but still greater than the market caps of more than 460 companies in the S&P 500.
Apple's cash mountain works out to $64 (U.S.) per share. And that figure is moving up fast. "At current growth rates, Apple could have close to $150 per share in net cash on its books by the end of fiscal 2013," estimates Barclays Capital analyst Benjamin Reitzes.
"Apple's cash pile makes it look more expensive than it really is," says Yair Reiner, an Oppenheimer & Co. analyst well rated in the Thomson Reuters' StarMine rankings. "If it were to hand out a one-time dividend of $60 [causing a commensurate decline in share price] its price-earnings ratio would drop to 12.5, transforming it to stunningly cheap."
In How to Buy Technology Stocks, Michael Gianturco applauded "enormous hoards of cash." As the business cycle matures and interest rates climb, tech companies "make better returns on their invested cash." Moreover, since tech shares rarely pay dividends and thus are not held by income investors, they don't get dumped for bonds.
Unfettered ability to finance growth
Apple's CEO, Steve Jobs, has said "cash in the bank" gives his company "tremendous security and flexibility." If Apple needs to acquire a piece of the puzzle to make something "big and bold," they can simply write a cheque. And now that Apple is back in the big leagues, it needs lots of cash to make moves that can "move the needle."
Mr. Reiner is comfortable with this scenario, despite Mr. Jobs recently taking sick leave. The Apple team "has taken extremely good care of its cash pile, avoiding poor acquisitions as well as unsafe parking spots, such as auction-rate securities."
"I think investors should feel confident that the cash they have sitting with Apple is safe, and that Apple won't part with it unless it sees very attractive risk and reward," Mr. Reiner elaborates. "Judging from products like the iPhone and the iPad, I'd say Apple is very adept at making that assessment."
Fear of diluting returns and capital
But many investors don't like to see big piles of cash these days, even at tech stars like Apple. With money market rates under 1 per cent, it's a major drag on returns.
They also question if there are enough opportunities of sufficient size for Apple's cash. "It's grown well beyond any reasonable strategic value," declares Andy Hargreaves, a Pacific Crest Securities analyst highly ranked by StarMine.
"We do not believe Apple could reasonably invest its entire cash balance in a manner that would offer returns that are on par with its current business," he adds. "Consequently, we believe the company should return money to shareholders either through a significant stock repurchase plan, a one-time dividend, or a regular dividend."
A regular dividend has particular appeal. "A dividend would allow many institutional investors to buy Apple that can't because their policy requires them to buy dividend paying stocks," notes Mr. Hargreaves." It may also appeal to the Baby Boomer generation's growing preference for income investments over growth investment.
Tavis McCourt, an analyst at Morgan, Keegan & Company Inc., believes paying a dividend can keep technology companies from diluting shareholder value. "By hanging onto capital to reinvest within the industry, competition is only increased - which ultimately lowers return on investment."
Restrictions due to overseas cash
Large U.S. technology companies hold much of their cash outside of the United States. Mr. McCourt estimates one-half to two-thirds is so allocated. Under current tax laws, if that cash is repatriated, about 30 per cent would go to the U.S. Treasury. Thus, there is a strong incentive to leave it overseas.
The industry is lobbying for a repatriation holiday (similar to the one granted during the last recession) or a change to the tax code. "But politically this is a tough sell given current populist sentiment," surmises Mr. McCourt.
Cisco Systems Inc. CEO John Chambers has declared his company will use its overseas cash to make aggressive acquisitions outside the U.S. if the tax rules don't change in 2011. Mr. McCourt is on the same page: "International acquisitions are the likely use of cash if no government relief is given," he remarks.