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Cash exceptionalism

Prior to implementing a dividend and share buyback plan, Apple had accumulated about $120 billion in cash and marketable securities. In the eight quarters since implementing the cash return plan, Apple has paid about $21.5 billion in dividends and spent another $53 billion of its shareholder’s money buying its own shares and retiring them. That’s $74.5 billion in cash that’s been removed from its balance sheet.

To avoid some repatriation taxes it also borrowed about $29 billion.

Of course, in the meantime, it also generated cash from operations.

Before the plan’s implementation, eyeing the cash allowed for easy tracking of the accumulation of retained earnings. After the plan it’s become a bit more complicated. The following graph shows all the quantities involved:

Screen Shot 2014-08-18 at 8-18-2.09.00 PM

The graph lets us answer the question “What would have happened if Apple had not paid any dividends, bought back shares and taken on debt?”[1]

The answer is in the blue line. It would be about $210 billion today. There are about a dozen companies other than Apple worth more than that amount.

As the company is not growing as quickly as it used to, the slope of the blue line is constant (i.e. it’s nearly linear.) Though that might be seen as evidence of failure, it’s more useful to treat this vast quantity as a recognition of past successes. The company’s beleaguered status needs to be carefully preserved.

Notes:
  1. The grey and black area of the last column is the total “cash returned to shareholders” and sums up to the $74.5 billion mentioned earlier. The grey area is only theoretically valuable as it depends on the outstanding (i.e. not retired) shares retaining their value. In this case, the value of the shares grew, making this an actual gain for shareholders []
  • GuruFlower

    That comes to approximately $65.50 per share (pre-split) for shareholders who owned the stock when the dividends and buy back began and held the shares. The total amount of the initial plan comes to ~$100/share over 3 years (I believe the buyback was increased as has the dividend). That is exclusive of any price appreciation (or loss) during the time frame.

  • Sacto_Joe

    Great chart, but it’s only half of the story.

    http://seekingalpha.com/article/2405845-apples-eps-and-all-time-high-are-higher-than-you-think

    This article outlines why the reduced share count is affecting commonly used metrics that influence investors. Most importantly, in my mind, is the effect on EPS. For example, Google Finance is presently showing an AAPL EPS of $6.19/share, obviously calculated by summing up the last four quarterly EPS results. But if instead one sums up the last four quarterly net income results, and then divides by the latest share count (5.99 billion per Google), one comes up wwith an EPS of $6.44/share.

    That in turn affects all the metrics that depend on EPS, including P/E ratio and PEG. And since many investors rely on those metrics to make investment decisions, that in turn devalues Apple below what it should be valued at.

    The effect on PEG is particularly dramatic.

    • Sacto_Joe

      Different people calculate PEG different ways. I look at it on a year-to year comparison basis.

      Wikipedia tells us why PEG is important: “In general, the P/E ratio is higher for a company with a higher growth rate. Thus using just the P/E ratio would make high-growth companies appear overvalued relative to others. It is assumed that by dividing the P/E ratio by the earnings growth rate, the resulting ratio is better for comparing companies with different growth rates.”

      PEG is basically found thus (Note: if there’s a bone of contention, here’s where it’s buried.):

      P/EPS/((EPS-(EPS 1 year ago)/EPS 1 year ago).

      In fy 2013, AAPL’s EPS was $5.68/share. Plugging that in, we get (97.24/6.44/((6.44-5.68)/5.68) or (97.24/6.44/(0.76/5.68) or 97.24/6.44/0.134 or 1.13.

      If we use the “wrong” EPS, we get a PEG of (97.2244/6.19/((6.19-5.68)/5.68 or (97.24/6.19/(0.51/5.68) or 97.24/6.44/0.090 or 1.68.

      1.13 versus 1.68 is a huge difference, considering that 1.0 is the dividing line between a “buy” and a “don’t buy”.

      Note also that I was forced to use the EPS from fy 2013, so my calculations are not going to be super-accurate. We need to wait a couple of more months until the end of fy 2014 to truly get an idea of PEG, but my guess is that Apple’s EPS is going to increase again this quarter, dropping the “real” PEG below 1.

      • Sacto_Joe

        Sorry – can’t seem to edit the above. Note that the $97.24 was the price of Apple last week when I first calculated this number. That has obviously changed, thus affecting today’s PEG number.

  • Sacto_Joe

    Here’s yet another way to look at the effect of stock buybacks:

    Horace Deidu has a new article ( http://www.asymco.com/2014/08/18/cash-exceptionalism/ ) where he looks at the effect of the buybacks and dividends on Apple’s cash. Basically, if not for them, Apple would have about $210 BILLION in cash as of the end of last quarter. If one thinks of Apple’s cash as a pie, Apple has taken out $21.5 billion (about a tenth) and returned it directly to shareholders. Long term debt ($29 billion) will also need to be accounted for.

    We also know that in fy 2012, Apple had about 6.62 billion shares outstanding, and that, per Google Finance, at the end of the last quarter it had about 5.99 billion shares outstanding. That’s a difference of 0.63 billion or 9.5%.

    And we also know that Apple used $53 billion to buy back its own shares, leaving it with a net of (210-21.5-53=) $135 billion in cash, plus about $29 billion in low interest long term debt. Now, the owed money is long term debt, and won’t be paid back in a lump sum. However, it does gain interest, albeit very little. Let’s assume that the total amount paid back comes to $35 billion over five years. Thus, we’d need to subtract about $5 billion/year in our net income over the next five years.

    Recalculating the total cash available at the end of last quarter, and counting one year’s debt repayment, we get about $130 billion.

    In 2012, when Apple stock was worth about what it is now, Apple had $75.6 billion less net income than it earned in 2013 and 2014, or about $134.4 billion. Dividing that by the share count at that time, Apple’s cash was worth around $20.30/share. By the same token, as of last quarter, we find that Apple’s cash is now worth $21.70/share.

    If we think of Apple’s cash as “potential dividends”, then Apple has increased its “potential dividends” by $1.70/share, while simultaneously delivering $21.5 billion dollars in dividends.

    Since we know that Apple is adding about $40 billion a year in new cash, and will dedicate most of that to both dividends and buybacks, we can thus expect that the amount per share in “potential dividends” will continue to rise.

    • Sacto_Joe

      We could also “add back” the dividend payments thus: Total payment per share thus far is $3.84. If the present stock share is 5.99 billion, then we can say that the present stockholders were given $23 billion worth of cash. We can then add that back to the $130 billion to get $164 billion in “potential and realized dividends”.

      In 2012, there were $0.76 worth of “realized dividends”. Thus the “potential and realized dividends” totaled (20.30+0.76=) $21.06 in 2012, and thus far in 2014 the “potential and realized dividends” total (21.70+3.84=) $25.54, for a gain of about 21%.

  • Viking

    At the beginning of 2013 one of the great unknown questions was what Apple would do with its massive cash holdings (growing at about $40 billion per year). Since that time they have increased the dividend twice, reduced outstanding shares by about 10% and increased their pace of buying other companies. Moving forward, we can expect more of the same (increasing dividends, share repurchases and small strategic acquisitions. In summary they have made decisions that likely would meet with Warren Buffett’s approval. Most companies blow the cash on overpriced acquisitions.

    • Sacto_Joe

      You raise a good point. Apple’s acquisitions sucked down a fair amount of cash as well and probably need to be considered as an addition to the chart.

      • markrogo

        Or looked at a different way… Apple occasionally spends $3 billion on something… One year it was a bunch of Nortel patents, another year it’s Beats…

        It also buys a bunch of small companies for de minimis amounts.

    • GlennC777

      Absolutely right, couldn’t agree more. Every time I read somebody suggest that Apple should buy Company X I hear Buffett sounding off about value-destroying acquisitions, done mainly for the benefit of management’s self-interest. Time Warner/AOL, Oh My God, what were they thinking?

      I’d go out on a limb and bet the vast majority of Apple’s relatively small acquisitions have been strongly value-accretive. And that you couldn’t say the same about Google, Microsoft or any of its other competitors.

  • fstein

    Great chart. Love your work, Horace. Would also like to see the amount of cash, etc. that is in the US, hence available for dividends.

    IMO, the beauty of Apple as an investment: Growth; Miniscular risk of downside; Increasing dividends.

  • RichardinMelbourne

    The cash balance should be offset against the rising provision for income tax which recognises tax Apple would pay if they brought cash back to the US. That is the cash is not all theirs but some will be paid later as tax.

    • http://www.asymco.com Horace Dediu

      There is no certainty about that.