Analyst believes company has too much cash

Analyst Katy Huberty with Morgan Stanley has issued a note to investors with the firm's belief that Apple is "more likely than ever" to pursue a course of share buy-backs or increased dividends to shareholders, noting that Apple's projected cash reserves over the new few years are "significantly more" than the company needs, AppleInsider reports. The company currently has $76 billion in cash on hand, one of the largest such reserves in the corporate world.

Analysts and some groups of investors -- particularly institutional investors -- have periodically called for Apple to reduce its cash stockpile and return more money to investors throughout the company's history, and Apple has usually ignored the advice. Comments from former CEO Steve Jobs as well as current CEO Tim Cook indicate that the executive team view the cash reserves as giving them the flexibility to make bold business decisions (such as strategic acquisitions) while avoiding debt, and the freedom to develop products that may take many years to prosper in the marketplace (such as the AppleTV or even the original iPod, which was not an overnight success).

Investors, however, seek to maximize returns on investment as quickly as possible -- and while Apple's stock performance has been stellar over the past few years, maneuvers such as stock buy-backs or dividends (two of the options Huberty advocates) would likely drive the price even higher by making it even more attractive to investors. She notes that the company's cash reserves currently represent 22 percent of its market capitalization, and could grow to $94 billion by the end of the year, and to $136 billion by the end of 2012 if it elects not to return cash to stockholders.

Huberty also mentions that Apple is "the only company in our coverage" that is accruing U.S. income tax on its foreign income, a rare move for corporations. Roughly $29 billion of Apple's cash is held in the U.S., and Morgan Stanley believes another $24 billion is eligible for repatriation to the U.S. without significant tax penalties.

The remainder of overseas cash would be subject to tax rates of 35 percent if it were returned to the U.S. -- leading Apple, Cisco and several other large corporations to lobby Congress for a "tax holiday" on repatriating overseas earnings that would temporarily drop the rate to five percent. The lobbying effort is seen as one of Apple's more controversial business moves, but the company appears to be preparing for the possibility of paying the full rate, as the U.S. government increasingly looks for new ways to reduce its own debt and the "tax holiday" idea loses favor.

Morgan Stanley believes that Apple management wants to reduce the large cash hoard, and will pursue one of three options to do so: further acquisitions, initiating a dividend or a one-time stock repurchasing program followed by a smaller, longer-term buy-back. Apple did in fact pursue the latter option in mid-1999 when the stock was trading under $14 per share, with then-interim CEO Jobs citing the belief that the stock was undervalued. Six months later, the value of the stock had doubled.

Similar calls from investors led Microsoft offer a $32 billion payout to investors in 2004 when the company was riding the success of Windows XP, after which the stock languished and remains "stuck" in the mid-$20s ever since. However, Huberty notes that historically, tech companies that initiated a dividend have outperformed their peers.

Of late, Apple has leveraged its cash reserves in two fairly innovative ways: large pre-paid orders with component manufacturers, and occasional purchases of patent portfolios. The recent expense of $2.6 billion on Nortel's 6,000 patents was an unusual and large expense compared to past performance, and its ramifications have yet to be seen -- but the $3.9 billion Apple spent earlier this year on long-term component contracts have already fouled competitors' plans to compete with products such as the iPad and the MacBook Air on pricing.

Apple has also pre-bought large quantities of flash RAM and touchscreen components, moves that in hindsight look extraordinarily prescient given the shift to "driveless" devices such as the smartphones and other touch devices. Then-COO Tim Cook is widely credited as the force behind such long-sighted buying decisions, alongside CFO Peter Oppenheimer.

The call for Apple to divest itself of more of its cash is not out of the ordinary, but complaints of this nature had tended to be lower-profile following the staggering performance of the company and its stock in creating value in the last few years. Just two years ago, AAPL was trading at $180 -- less than half of its current value. The sudden change in CEOs last month has had little negative impact on the stock, and analysts and investors alike seem confident that Apple can -- at least in the short term -- continue to increase the company's value. [via AppleInsider]

by MacNN Staff