Apple's $46bn cash holding a golden delicious dilemma

APPLE CHIEF financial officer (CFO) Peter Oppenheimer faces a dilemma that perhaps every finance chief wishes to have: obscene amounts of cash and nowhere to put it.

The iPhone, iPad, iPod and Mac computer maker has accumulated a cash pile that totals nearly $46 billion (€34.6 billion), the biggest cash hoard among US tech companies and equivalent to a fifth of Apple’s market capitalisation.

And yet, due to an ultra-conservative investment strategy and low interest rates, that cash is earning next to nothing for Apple as the company rarely makes acquisitions and does not pay a regular dividend or buy back stock.

“Oppenheimer probably has the most enviable CFO job on the planet,” joked Creative Strategies analyst Tim Bajarin, who has been following Apple since the early 1980s.

Analysts say Apple’s near-death experience in the 1990s helps explain why it likes to remain liquid by investing in safe but low-yielding US Treasury and agency debt.

The company earned a mere 0.76 per cent on its cash and investments in its most recent quarter, down from 1.43 per cent in fiscal 2009, 3.44 per cent in 2008 and 5.27 per cent in 2007.

Despite these low returns, Apple does not face much pressure these days to put its cash to better use. Any dissenting investors are probably appeased by the meteoric rise in the company’s share price, which has tripled since 2007.

“When a company is growing as fast as Apple, cash management is pretty far back in people’s thoughts,” said Pacific Crest Securities analyst Andy Hargreaves.

“But that’ll change at some point,” he added, estimating that Apple’s cash could hit a cool $65 billion by the end of its 2011 financial year if the company continued to generate free cash flow at the current pace.

For now, Mr Oppenheimer has a mantra that he repeats on every quarterly earnings conference call. He tells Wall Street that Apple’s investment priority is the “preservation of capital” with a focus on “short-dated, high-quality investments”.

Mr Bajarin said Mr Oppenheimer’s cautious approach dates from his time at Automatic Data Processing, but Apple’s conservatism is also driven by chief executive Steve Jobs. Both Mr Jobs (55) and Mr Oppenheimer (47) subscribe to the Silicon Valley maxim that “only the paranoid survive”, he said.

They remember the dark days when Apple was struggling to stay alive and had to lay off thousands to cut costs. When Mr Oppenheimer joined the company in 1996 as its controller for the Americas, a series of bad management decisions had eroded profits and sent its share price diving to less than $5. Things got so bad that one of the first things Mr Jobs did when he returned to Apple was take a lifeline in the form of a $150 million investment from Microsoft in 1997.

While those days may be long gone, fiscal prudence could be here to stay. Apple’s financial estimates are almost comically conservative, delivered every quarter by Mr Oppenheimer, who has rarely strayed from the script since he became CFO in 2004.

The Cupertino, California-based company runs a tight ship: total revenue rose 75 per cent between 2007 and 2009, while operating expense rose just 45 per cent.

Although Apple is famous for innovation, research and development costs only account for 3 per cent of revenue – far lower than at Microsoft and Cisco, due in part to Apple’s narrow product portfolio. Apple does not appear to pay especially high salaries, either. According to career website glassdoor.com, which relies on anonymous users sharing their salary data, an Apple software engineer earns around $100,000 per year, roughly the same as engineers at Google.

Production costs are also kept low, due to contract manufacturers like Foxconn International Holdings.

“They’ve entered a lot of new markets without a significant capital investment . . . without really betting the farm,” said Hudson Square analyst Daniel Ernst. “They haven’t really needed to,” he said, pointing to the iPhone as an example.

Apple makes few acquisitions because it develops products internally, and pays little for what it does buy. Analysts say they do not expect Mr Oppenheimer – who told CFO Magazinein 2000 that he learned finance from his father and grandfather – to make significant bets with Apple's cash in the next few years. – (Reuters)