Apple's cash overflow leads to flood of calls for dividend

APPLE’s chief executive Tim Cook has a problem, a $98 billion (€74.4 billion) problem. Just 18 months ago, the company’s $46 billion mountain of cash – huge by most standards – attracted only muted complaints from investors, who did call for a dividend or share buyback, but were mostly happy with the meteoric rise in the stock price.

But with the growing cash balance now a much bigger overhang on the stock, widely considered to be undervalued, investors are clamouring more vocally for Cook to put the money to work.

No one could have foreseen just how quickly that warchest would grow.

Indeed, some analysts estimated Apple’s cash holdings would increase to $65 billion at the end of 201l. That it has swelled nearly 50 per cent above even those lofty projections is nothing short of awesome.

Apple now has about $104 (€80) in cash per share. But, to paraphrase rapper P Diddy, with more money comes more problems.

Apple’s runaway success presents Cook with his first real public test as chief executive: figuring out what to do with the money.

Apple’s cash balance is now a quarter of its $415 billion market capitalisation. And even though $64 billion of Apple’s cash is overseas – meaning it will have to pay a hefty tax to bring it into the US – calls for a dividend on Wall Street grew louder after the company said this week it was in “active discussions” internally on what to do with the money.

“They are clearly trying to signal that they are not ignoring the issue,” said Michael Holt, an analyst with Morningstar. “It doesn’t mean that a decision is imminent.”

Others, however, are convinced a dividend will be paid this year. “With Apple stating that it is ‘actively’ pursuing its options with regards to its cash balance, we believe the commentary may be setting itself up for a cash dividend in FY12,” said Ticonderoga Securities analyst Brian White.

Apple’s stock gained 25 per cent in 2011, adding about $77 billion to its market cap, and it touched an all-time high of $454.45 on Wednesday. The company’s core business is throwing off massive amounts of cash every quarter – Apple recorded a $16 billion increase in cash sequentially – in part because of its reluctance to pay a dividend or buy back stock, and its limited acquisition history.

Financial prudence has long been part of Apple’s mantra and the company runs a tight ship, with total revenue rising 66 per cent in fiscal year 2011, but operating expenses rising only 37 per cent.

For now, Apple’s chief financial officer Peter Oppenheimer has veered away from his usual script, which was to tell Wall Street that Apple has always had internal discussions on the best use of its cash, with capital preservation being key.

Oppenheimer also suggested that Apple might invest in its supply chain or make acquisitions. But Apple has typically preferred to acquire small companies, which has had little or no material impact on its results so far.

Apple’s major expense last year was paying the lion’s share to acquire – along with Microsoft and a few other companies – the patent portfolio of bankrupt telecommunications company Nortel for $4.5 billion.

That is in sharp contrast to rivals such as Google, which is acquiring Motorola Mobility for $12.5 billion in cash, and which completed 54 acquisitions during the first nine months of last year alone. Google has also resisted pressure to announce a dividend or buy back stock.

Apple may do the same in the next few months, said Michael Walkley, an analyst with Canaccord Genuity.

“We believe Apple is likely to announce a dividend during 2012, potentially next quarter when crossing $100 billion in cash and cash equivalents,” Walkley said.

“We view this as very bullish for investors, as we believe a new group of investors seeking dividends would invest in Apple and drive shares higher.”

( Reuters)