The Apple Cash FAQ

  • How much cash does Apple have?

To the nearest million, as of the end of September 2017, Apple’s cash and investments totaled $268,895,000,000. Note that this includes investments in the form of short- and long-term marketable securities. Long-term marketable securities are not always accounted as “cash” because strictly cash is considered a liquid asset and some securities may not be sufficiently so. Nevertheless, most analysts would agree that Apple’s securities are sufficiently liquid to qualify as cash. Note that for archaic reasons this cash is separated into US and non-US holdings with $17 billion located in the US.

  • Most businesses keep very little cash on their books. Why does Apple have so much cash?

Indeed Apple’s cash is extraordinary. It amounts to about 30% of its market capitalization. One reason is that Apple has taken many loans, totaling about $100 billion.

  • Whoa! Why would Apple need to take out loans? Does it have problems with cash flow?[1]

Quite the contrary, Apple’s operating cash flow is eye-watering. In the 2017 fiscal year (ending September) Apple generated $63,598,000,000 from operations. The loans are not needed to operate. They are used to pay shareholders.

  • Why does Apple need to pay shareholders?

Because it’s their money.

  • Wait, I thought you said this was Apple’s cash.

Apple is holding it for them but if it has more than it needs it’s obligated to return it. You see, If you were to look for “cash” in financial statements you find it on the balance sheet as an asset. Since it is growing and since a balance sheet has to balance, there has to be a liability that grows in proportion to offset the cash asset. That liability is called Shareholder’s Equity. This is a “debt” the company has to shareholders. If it pays out cash to shareholders then it zeros out an asset and a corresponding liability. The net is zero as far as Apple is concerned but shareholders get something in return for giving Apple money in the first place.

  • So hold on, it takes out loans to pay shareholders because it “owes them money” while it has too much money? This makes no sense.

Yes, welcome to tax laws. Although it generates more money than it can use, and that money should thus be returned to shareholders, some of the money is collected outside the US. US (and US only as far as I know) tax laws have a “repatriation tax” that is levied on money coming into the country.  This has nothing to do with corporate taxes which are levied on earnings. So after paying shareholders with the cash it had in the US, Apple had to borrow money to pay shareholders money they had outside the US.

  • Why not just pay the repatriation tax?

Because then shareholders would get less than 70% of their money. They would probably complain and blame the managers for being incompetent. Such blame usually comes with a lawsuit attached.

  • What about the new tax law that lowered the repatriation tax rate?

Now Apple has no option but to pay the tax and repatriate the cash. It’s still a tax. The amount will be about $38 billion or about 15%. Previous repatriation “holiday” levies were around 10%.

  • How exactly does the company give money to shareholders?

The payments are called “dividends” and shareholders must treat them as income–a form of double taxation because these funds are after the company paid earnings tax and possibly repatriation tax. Apple does pay dividends regularly but because of tax inefficiency (i.e. because government policy discourages dividends) the company mainly buys its own shares and retires them.

  • Huh?

Yes, it makes little sense but the math is simple. If the company buys its own shares and makes them disappear then existing shareholders will end up owning more of the company, making their shares more valuable. They can realize the gain if/when they sell the shares (and pay capital gains tax instead of dividend income tax on the already (double) taxed profits.)

  • Does that mean that it is going private?

No. The owners of the company remain the same: whoever owns shares owns the company and they can be traded in public exchanges. In theory they could reduce the share count to a single share and there would presumably be a single shareholder who would own the company, making it “closely held” but the company’s managers are still required to report and act as if it was public. Going private usually means a set of shareholders agree not to allow the shares to float on the open market and thus to also keep the affairs of the company out of public eye. It reduces liquidity and is generally harder for shareholders to exit their investment. This has nothing to do with reducing the number of shares in circulation–which is what Apple is doing.

  • But buying shares does not seem to affect the share price so the shareholders are not benefiting from the repurchasing. Isn’t this a waste of cash? Aren’t the shareholders being robbed?

The share price is an argument between shareholders and potential shareholders on the value of the company. It should reflect reality but many times it doesn’t. Over time however the math catches up with sentiment. In other words realization that there are fewer and fewer shares available compels people to not sell them, increasing the price. Short term investors tend not to pay attention to this but they are not the shareholders who Apple wishes to pay back anyway.

  • Why doesn’t the company spend the money on other things? You said they return what they can’t use. Why can’t they use it?

Simply, because it’s more than can be spent wisely. The company considers its mission to be very narrow: add value in specific areas where they can create tremendous value uniquely and under conditions (technologies and business models) they can control. Many such projects don’t require capital. Manufacturing, data centers and Apple stores require capital but R&D and sales not so much. Creating products is very cash efficient. For example, the iPhone–the most successful product of all time–cost almost nothing to develop; certainly nothing that required Apple to dip into its cash. Funding for the type of product development Apple does comes from existing cash flows and mostly consists of salaries for their employees.

  • What about acquisitions? Why not buy other companies?

It buys companies but usually small ones which are essentially acquisitions of teams and their intellectual property. Apple does not buy “business models” or customers or cash flows which is what large companies are valued for. Operationally, it’s also because Apple has a strong culture and it wishes to preserve it. Acquisitions dilute culture which is why integrations often fail. Statistically, large acquisitions are value destructive and the larger they are, the more likely they are to fail. Incidentally, when a company is acquired with cash that hole in the balance sheet is filled with something called “goodwill” which reflects some intangible value of the new asset. If and when the acquisition is deemed to have failed the goodwill is written off and so is shareholder equity. That’s how shareholders are robbed.

  • What about keeping it? Doesn’t having lots of cash make Apple more powerful?

As individuals we think that having lots of cash makes us rich. For companies it’s the opposite. Cash is a liability. If you come across a company that is cash rich and has nothing else, its enterprise value will be zero. Companies are valued on their future cash flows, meaning their ability to generate cash, not how much they managed to keep. In other words, cash is a measure of past success and investors are interested only in future value. That future value comes from the intelligent allocation of resources toward a valuable goal. A company rich in cash but poor in vision is likely to be taken private or broken up and shut down. Cash is an IOU to shareholders with a thank-you note for the support through the years.

  1. Companies often borrow because they need to plug gaps in profitability, best measured as “free cash flow”. []
  • Ian Ollmann

    “Cash is an IOU to shareholders with a thank-you note for the support through the years.”

    If you take all the people involved with the iPhone: engineers, support staff, management, customers, geniuses, and investors, the group that had the least to do with the success of the iPhone was the investors:

    “Creating products is vey cash efficient. For example, the iPhone as the most successful product of all time cost almost nothing to develop–certainly nothing that required Apple to dip into its cash.”

    Yet, the investors profit the most handsomely. I own quite a bit of AAPL, but I have come to view the shareholders as parasites, and faithless parasites at that.

    I understand the tax implications and this tactic is of course very common, but I remain astonished that Apple chooses to pay most of the money specifically to the most faithless of the faithless parasites, the sellers. It is a world turned on its head.

    • Anonymous Coward

      > If you take all the people involved with the iPhone: engineers, support staff, management, customers, geniuses, and investors, the group that had the least to do with the success of the iPhone was the investors.

      And all the rest of them (engineers, support staff, management, customers, geniuses) were paid directly by Apple.

      • Anonymous Coward

        Ok, except the customers.

      • NoiseShaper

        The customers are the arbiters of success, since they provide the rewards from their own resources by their own judgment and purchasing decision.

        But the customers still don’t create the product. (Except for some very limited indirect influence via feedback.)

      • Ian Ollmann

        Sure, but nowhere near what their creation actually turned out to be worth. A bunch of other people who had pretty much nothing to do with the most successful product ever scooped up the profits.

      • demodave

        Respectfully, I disagree. When I first invested in Apple, it was because I believed in the company and what it did. That was in 2002. Although things were pretty good at that point, future success was not assured. I was a zealous believer in Apple’s vision, though, and my “faith” has been rewarded.

        My faith is also not uncritical: just as in my own workplace (not Apple), I want my providers (both work, and Apple) to always be striving to do better – and I frequently find opportunities for that (to do better)!

        I also buy Apple, so I contribute to Apple’s products doing better.

        Don’t know your beef, Ian, but it seems misguided.

      • kassykat

        Spoken like someone that has never been involved in business.

    • klahanas

      Though I philosophically agree with you, wages are what you get to keep your job.

      “engineers, support staff, management, customers, geniuses, and investors, the group that had the least to do with the success of the iPhone was the investors” It’s the investors that are paying everyone else by collecting the money from the customers.

      Nothing is more powerful than ownership! (unless you own an iOS device)
      When you buy an iPhone, it’s an exchange of ownership (sort of) between Apple’s investors and you. They get your money you get their gizmo They run the company with the money the customers paid them.

      Now if your complaint is with other money grubbing shareholders that might not have your love of the company or loyalty to it…that’s what happens when you sell out and go public. It’s also why it’s gambling.

    • Shareholders don’t build anything and don’t deserve credit for building Apple’s success but they are the rightful owners. The division of ownership from operations of a company is a wonderful construct. Without it scale cannot be achieved. The invention of limited liability, instruments of finance and fiduciary responsibility enabled the industrial revolution (invented in the Netherlands, by the way). It allowed far more to be achieved than what could be done with owner/operator enterprises.

      • Ian Ollmann

        I suppose it all depends on whether you believe the bottleneck is capital or creativity. I don’t dispute the importance of having enough capital, especially hundreds of years ago or even a few decades ago. However, if that was really the problem today, I should think Apple would have a much harder time competing. The world is awash in capital! Moreover, as you’ve already noted, investment capital is no longer needed by Apple. The customers finance the whole thing with quite a bit of money left over with no place to put it.

        You have talked before about the changes in the ability of various layers to capture value as a result of disruption. What is preventing it here?

      • Walt French

        There need not be an either/or question regards bottlenecks. Both capital & “creativity” contribute to a firm’s success.

        In a case such as Apple’s—and, I’d argue, for MOST of the US’s big companies—capital is NOT the critical factor any more. Ditto for the overall startup situation: net share issuance—mostly IPOs less buybacks—has been near zero recently. Companies keep making more and more money from non-capital factors, which may be “rent”—suggesting economic inefficiencies, exploiting brands or other IP in a way that discourages competition.

      • normm
      • normm
      • normm
    • regexp

      Believing that the owners of a business as “parasites” is a very cynical way of looking at the world.

      “engineers, support staff, management”

      By all accounts they are all rather well compensated for their jobs. And Apple employees generally like their employer. And even more so as Apple just granted all of them RSUs.

      Have you ever actually worked for a large organization?

      • BookWorm

        Apple is well known to skimp on total compensation compared to other SV companies like Google and Facebook. They also spend the lowest on R&D of any of the Bay Area giants.

        The company could easily spend a lot more on basic research like Bell Labs, Xerox PARC, IBM, Google, HP, and others in their supply chain. To me it looks like they disproportionately pay off shareholders compared to giving back to the ecosystem, their own engineers, and the research community, relative to other companies.

        Hell, they had to have their arm twisted just to let their AI researchers publish research papers.

      • NoiseShaper

        Apple spends a relatively small portion of their utterly gigantic revenue for R&D, simply because they are selling their developed products by the millions – their most profitable product even by the hundreds of millions!

        Spending more on R&D seems mostly limited by the difficulty of finding enough developers and productively integrating them into the company (which is not as trivial as some may think), not limited by the required financial outlay, obviously.

      • klahanas

        I understand and respect both your point of view. I think both your common metric (%R&D dollars) is wrong, but I must lean in agreement with Bookworm.

        %R&D dollars is easy for financial types to measure and understand and to sell to their customers. It’s a really lousy metric however.

        What if the currency of R&D cred are Nobel Prizes, or other R&D level awards?

        AT&T Bell Labs
        Proved the Big Bang (Penzias and Wilson).
        The semiconductor (Shockley, Bardeen, Brattain)
        Research in Magnetism (Anderson)

        IBM gave us the Scanning Tunneling Microscope, which let us see atoms.(Binning, Roher)
        Superconductivity Research (Bednorz and Muller)
        Quantum Tunneling (Esaki)

        And others…. And other prizes…

        These discoveries not only brought wealth and prestige to their parent corporations, but advanced the forefront of human knowledge.

        Any inkling on whether Apple is in this R&D league? Maybe, maybe not. I certainly don’t see them there.

      • normm
    • Engineers, support staff, management, etc. receive stock options as compensation, so most of them are shareholders.

      • A Guy

        Stock compensation is huge. If Apple had to pay more cash to employees instead of stock compensation the cost would be tremendous. So Apple needs to keep its stock high and increasing to get folks to take their salary part in cash and part in stock options.

        This is a huge issue in Silcon Valley and with tech companies in particular. It puts tremendous pressure on management to keep stock price growing because their top employees see that stock as a major part of their compensation. If they lose faith in the stock, many will leave for other companies where the stock is perceived to have more upside.

    • NoiseShaper

      If you take all the people involved with the iPhone: engineers, support staff, management, customers, geniuses, and investors, the group that had the least to do with the success of the iPhone was the investors:

      In a properly balanced economy (fiction!) shareholders get dividends and share appreciation in return for the risk of losing their money if the company is mismanaged and/or the developers screw up and nobody’s buying their products any more.

      Apple has almost been at that point already, and if there hadn’t been enough shareholders keeping their money in the company, none of the later Apple products would have existed because there wouldn’t have been enough money to pay developers with.

      It bears mentioning that Apple is an absolute extreme exception right now in that is practically printing money, seemingly without major effort. (Which of course isn’t true at all!)

      But that is not at all the rule, and many companies struggle, decline and ultimately fail, taking all their shareholder’s money with them. And who knows, Apple may yet suffer that same fate, too, some decades into the future.

      So ideally shareholders have a legitimate function in a corporation, and while employees can pack up and go if their pay check doesn’t arrive with regularity, shareholders are in it with their own money, even when nobody would buy their shares for what they’ve once paid themselves…

      • kassykat

        In 1996, Apple stock was at $3.50 a share and that is not even including the massive amount of splits since then. That was the actual cost per share, and since then, the stock has had (2) 2:1 splits and the famous 7:1 split. Taking those into account, the price was 12.5 cents per share.
        So, yeah. I think the shareholders that hung in there definitely deserve what they were paid.

      • NoiseShaper

        I don’t see how the splits and the share appreciation had anything to do with the shareholders “deserving” that.

        They just lent their money to Apple and were lucky that it grew faster than it would have elsewhere.

        It’s just how the system works.

    • normm
  • Luis Alejandro Masanti

    quote: “In theory they could reduce the share count to 1 and there would be presumably a single shareholder who would own the company, making it “private” but the company is still required to report and act as if it was public.”

    If Steve Wozniak’s desires could hold, he would be that owner!
    Long time ago he said that he wanted to always have 1 share of Apple.

    • deasys

      That’s an interesting tidbit, Luis. Unfortunately for Woz, I too intend to hold that last share so I guess it’ll end up being just the two of us with one share each. How wonderful it will be to own a $200* share that earns billions in quarterly dividends!

      * Mr Market is—and has been—clearly ignoring the reality of Apple so I expect AAPL will still go for about $200/share even when there are just those last two shares outstanding. /sarc

      • Luis Alejandro Masanti

        With all due respect, Woz want to hold a share of Apple because he want to have a piece of the company he funded with the other Steve.
        Your monetary reason are quite valid… but quite different.

  • klahanas

    Very nice explanation.

    A sincere question, one who’s answer may have sincerely gone over my head.

    The moneys earned outside the US have likely been taxed outside the US? No?

    The US would then credit any taxes paid to foreign governments to the moneys being repatriated. Also correct?

    If the taxes already paid to foreign governments are greater than the taxes that would have been owed on that money in the US, there should be no US tax. Right? Otherwise the US would tax the difference at US rates. Right?

    Where am I wrong, and what might I be missing?

    • I don’t claim to have direct knowledge but I believe International tax treaties are in place that taxes are only levied on earnings in the countries where a company is domiciled. So VW will pay tax in Germany for earnings in the US. This gets complicated when there are subsidiaries and transfers between them. This makes intuitive sense because revenues are in one place but expenses can be in many places so earnings, which are a function of both, cannot be allocated to a single place. You sell an iPhone in France but you pay suppliers world-wide and your employees in California. So where did you “earn” a profit? Because of this treaties are in place to prevent double taxation and keep predation of firms to a minimum.

      The logic also applies to individuals. You should be taxed only where you live not where you earn because you obtain services where you live, mainly. (The only countries where individuals are taxed based on their citizenship regardless of where they live are the US and Liberia.)

      • klahanas

        Thank you for your reply. I’m sure you can appreciate the importance of the answer, either way.

        So then…if Apple has been paying tax on it’s international income, why is there a barrier to repatriating the that cash? That such a “go home” tax even exists? Unless it wasn’t taxed in the US. Hmmmmm….

      • pk_de_cville

        “…why is there a barrier to repatriating the that cash? That such a “go home” tax even exists?”

        The previous barrier was the US 35% corporate tax rate when funds are //repatriated//. Apple would have owed 35% minus the credited foreign taxes already paid. Today Apple owes //15%// minus the credited foreign taxes already paid.

      • klahanas

        That’s how I understood it intuitively. You are thus confirming it so. It’s only fair then that repatriated tax be whatever the tax rate is.

      • A Guy

        Fair is a tough question. It certainly is the rule in the U.S. But it is pretty much not the tax rule anywhere else. In England, for example, if foreign subsidiaries earn a profit overseas (for example, making a product in China and then selling it for a profit in Japan) the foreign sub can send the money back to the English parent company and there won’t be any taxes. The U.S. is an extreme outlier on these international tax issues.

      • klahanas

        I agree that taxes paid by the subsidiary to foreign jurisdictions should be credited by the nation where the funds are repatriated. To me that is fair.

        To essentially abolish taxes on repatriated income is not. Unless your domestic tax rate is zero, why should your repatriated monies be zero? Isn’t that an incentive to have all your income abroad?

        But who am I to judge, England is a sovereign nation. They’re free to be a Monarchy if they wish… ;-p

      • A Guy

        If you want to sell to Japanese customers, you have to sell in Japan. The incentive is really that there are potential customers overseas. But that does not mean you ignore potential customers in the U.S. Generally tax rates are not the driving issue in business investments, it is usually about going where the customers are.

        Yes there are arguments on both sides of this issue. But what is clearly a bit silly is Apple parking cash overseas for years in anticipation that U.S. policies would eventually change and allow the money to come to U.S. at a lower tax rate. But that is what has happened.

        And even if Apple is now going to pay lower taxes by playing this waiting game, eventually the shareholders will pay some taxes when they get their hands on the money. So I would say it is all kind of fine and at least Apple will stop doing this cash accumulation waiting game.

      • klahanas

        I understand why (not just) Apple has been waiting for a favorable tax rate. From their point of view it’s the right decision. It’s still new lower taxed domestic income. Meanwhile I think (not sure) that individuals need to report and are taxed on any foreign earned income the year it was earned, less any foreign taxes. If true, I don’t consider that fair.

      • Space Gorilla

        Yes, it’s fairly simple. You wanna bring the money back to the US you gotta pay the difference. This has been done before in the US, in 2004 with an even lower tax rate holiday, and most of the money went to share buybacks and dividends.

      • bloftus

        No. They get a credit for foreign taxes. In some cases – they had paid very little. We will find out in their earnings the exact amount they did pay as well as the amount they bring back.
        Here is an article that helps to explain things.

      • klahanas

        Well, that notion is in my questions. It seems that taxes “may” have been paid in the US. If not, they should be, less any foreign taxes paid on the same money.

      • klahanas

        Good question on where a profit is “earned”. I don’t know, but if it were up to me “Apple US” would be selling to “Apple Ireland”…

      • jacopogio

        HI, to follow our discussion from Twitter, as the Fortune article pointed by Bloftus just here, explains: “The U.S regime imposes our statutory 35% tax rate on earnings booked anywhere around the globe; multinationals are obligated to send the Treasury the difference between our 35% and what they’ve already paid in the nation where they produce the products. And that difference is often big. If a pharma or tech giant repatriates profits from Ireland, where the top rate is 12.5%, it would face an additional tax of 22.5%. That’s so stiff that U.S. companies pass up rich opportunities stateside just to avoid the hit.”
        So, if countries where Apple gets its foreign revenues imposed Apple earnings at 30-35%, the available cash would be much smaller.

      • So Apple only pays the difference between Ireland’s 12.5% rate (for profits held in Ireland) and the new 15.5% US tax rate? So 3%? That explains a lot.

      • NoiseShaper

        The thing is that Apple had a sweetheart deal with Ireland which pushed taxation even lower than that to only a fraction of a percent, which is exactly why the EU sued Ireland for breaching european regulations with excessive subsidies (an almost complete tax rebate just for Apple, while other irish businesses would indeed have to pay those 15%).

        Apple is now forced to put the difference into an escrow account until that suit is finally resolved, and if the EU gets its way they will indeed have to pay that money to the irish state – against the will of the irish government who’d rather like to keep special tax loophole deals as a way of luring tax-dodging corporations there. That’s just not legal within the EU so at least in future it is unlikely to be an option any more.

        So in the end the question is whether the billions in that escrow account will go to Ireland (if the EU has its way) or to the US (if Ireland has its way, ironically!).

      • klahanas

        As much as this is out of character for me…
        Apple is the victim here. Ireland made a deal Ireland had no right to make.

      • NoiseShaper

        Uh, “victim” would be seriously pushing it!

        When you’re a huge multinational corporation that’s dodging taxes via complex shell corporation structures and bizarre accounting schemes tailored precisely to the differences between the tax regimes in different countries and you’re pushing for extra-special, individual deals undercutting even the already rebated tax regimes, then turning around and suddenly feigning ignorance of the laws and regulations in and around exactly those countries is far into the realm of the ridiculous.

      • klahanas

        Hey, you won’t need to twist my arm to hard to come your way on this matter.

        Ireland, as a sovereign nation, is and should be, held to a higher standard. They made this deal in violation of EU policy to which they agreed. In fact Ireland is a charter member of the EU.

      • kassykat

        “No right to make”?? It is THEIR country. The EU is simply ticked that Ireland is undercutting them. And BTW, it was not and is not “illegal”. Ireland is a sovereign country. The only the EU can do is complain, and threaten to throw Ireland out of the EU (Britain already left).

      • NoiseShaper

        It’s actually not that simple at all.

        EU membership is effectively a multilateral treaty each member country has with all the other member states and breaching the rules which have been agreed upon among all members is a violation of that treaty which can very much have consequences.

        Just as every other treaty between countries only makes any kind of sense if they can somewhat rely on the respective other country not suddenly claiming that it was its “sovereign right” to do whatever it damn pleased.

        Anticompetitive behaviour is of course against the principles of the EU, and while Ireland’s normal corporate tax is within the range agreed upon in the EU, undercutting that range with individual special rebates is against the rule because it is considered tax dumping.

      • Childermass

        This is true but made more controversial because, when the deal was made, no-one thought that competition law would be applied to corporation tax. Now, apparently, it is being so applied. Further, in most legal jurisdictions, retrospective punishment is frowned upon. By making this ruling Brussels has redefined the remit of competition law and applied it retrospectively.

        Yes, Apple, and other trans-nationals, do these deals to minimise tax. Is that right? Is it moral? Maybe, but can you re-define the rules and back-date them?

        It is as if the speed limit has been changed in your town and they are now going to bang you up for speeding five years ago.

      • klahanas

        “no-one thought”? or “no-one knew”? Either way, was it law?
        You can’t be not guilty just because you got caught.

      • Childermass

        Wasn’t ‘law’ then, isn’t ‘law’ now. Just EU re-interpreted rules. Guilty of what? Not knowing? Not guessing? Greed? Criminal actions? Being American?

      • klahanas

        Then Ireland should have no problem in court…
        Or the most likely scenario… You don’t know either.

      • klahanas

        Ireland can charge any tax rate they want as a corporate tax rate for ALL companies. What they cannot do, by treaty, is give preferential tax rate to SOME companies. They freely agreed to that.

      • klahanas

        This now explains why the US wanted to support Apple in their dispute with the EU. Ireland is going to be obligated to collect their 12.5% versus 1% (or whatever it was), the US is only getting 3%, instead of 14% or whatever.

        Had this gift rate of 15% not been given, Ireland still gets 12.5%, and should Apple want to use foreign earned money in the US, they would have had to pay the 22.5% difference to 35%.

      • kassykat

        “The logic also applies to individuals. You should be taxed only where you live not where you earn because you obtain services where you live, mainly. (The only countries where individuals are taxed based on their citizenship regardless of where they live are the US and Liberia.)”

        “Should” is the operative word here. Unfortunately, bureaucrats love to think that everyone else’s money belongs to them for no reason other than the fact that they are the bureaucrat, and they will do everything they possibly can to get that money – including making things illegal AFTER the fact.
        Personally, I have no idea why so many people are so eager to give everyone’s money to a bunch of useless, wasteful bureaucrats that do nothing but look for ways of taking money from everyone else.

      • NoiseShaper

        Personally, I have no idea why so many people are so eager to give everyone’s money to a bunch of useless, wasteful bureaucrats that do nothing but look for ways of taking money from everyone else.

        I don’t know what it’s like in your country, but in some countries “bureaucrats” actually keep the infrastructure running and uphold law and order by asserting the democratically negotiated laws as mandated by the elected government.

        And yes, that does cost money.

        But no, that doesn’t automatically mean that all taxes are just wasted but it means that we actually need to bother checking which public expenses are actually effective and which aren’t.

        Which is again one of the primary purposes of an elected government, which may or may not see the need to make changes to the bureaucracy if it doesn’t work properly.

  • Great analysis! I really enjoyed reading it.

  • Is there a reason why debt slowly but steadily started growing in 2013? I assume Apple paid dividends before 2013, no?

    • PeterDrier

      dividends are on the chart.. and basically no they didn’t

      • They actually did in higher cash amounts per share and stock splits? Not sure if the gap between 2005 and 2012 is related to the previously given 2-for-1 stock split or it was a senior management decision

      • PeterDrier

        A stock split isn’t a paid dividend as most people would consider them. It’s included in the dividend history as the clearing backends process it that way, but technically a 2-1 split conveys 0 value transfer. Otherwise Apple had no CASH dividends between 1995 and 2012. Presumably because Apple wasn’t flush with extra cash during those years to hand out.

      • jayhalleaux

        It was because Steve Jobs did not believe in dividends.

      • Splits or their opposite do not affect the capital returned to shareholders. Cutting a cake into 4 pieces instead of 10 pieces does not affect the size of the cake or how much of it is available to eat.

    • The reason is given in the FAQ. The company did not have any more US cash to return and foreign cash was subject to a heavy tax burden.

  • ToddbboT

    Apple has been setting aside $ for years in anticipation of repatriating the overseas cash. I’m unclear on how this with show up accounting wise but I suspect that subtracting US tax from the actual amount being repatriated isn’t the correct way to look at it. Apple put out a white paper during 11/2017 which details a lot of the info on foreign earnings and taxes. Here is a quote from that paper:

    “3. Apple has cash overseas because that’s where it sells the majority of its products. Under the current tax system, post-tax earnings from foreign sales are subject to US tax. Apple has earmarked more than $36 billion to cover US deferred taxes. This is in addition to the $35 billion the company paid in corporate income taxes over the past three years.”

  • Walt French

    This is the best non-specialist explanation I’ve seen of valuation, cash, dividends, buybacks, etc. Thank you!

    “[Q:] But buying shares does not seem to affect the share price so the shareholders are not benefiting from the repurchasing.”

    Looking at the total market value of AAPL, buying shares back pays out cash from its balance sheet, which reduces the total firm value. However, it ALSO reduces the number of shares outstanding by about the same percentage, so the price/share SHOULDN’T bounce around a lot…it ought to shift only if the market perception of the value of the cash/share changes.

    It’s an interesting Q of what is the “right” value for cash on the company books, where “right” means whatever investors (and the marginal non-investors) think. Many analyses look at the market value ex-cash to get a more sensible P/E ratio, consistent with ongoing operations, and presuming the cash will eventually go to either dividends or buybacks, equivalent but for the tax issues raised.

    • kpom

      The main argument for buybacks vs dividends is the tax treatment. Shareholders sell for myriad reasons (diversification, pay off debts, retire, tax bills). Be the buyer and it maintains the market.

      • It also has a use in keeping powerful shareholders from getting enough stock to take over the company.

      • NoiseShaper

        How so? They’d just need to sit on their shares until the company itself had bought out all their competitors for ownership!

      • normm
      • NoiseShaper

        Also all 404.

      • normm
      • Walt French

        Yes, as I noted in my final words, “…equivalent but for the tax issues raised.”

        Were it NOT for different individuals’ tax issues, or if dividends were taxed the same as cap gains, the impact on both the company’s books and the aggregate of all shareholders, would make a buy-back just the same as a reverse split+dividend. E.g., buying back 5% of the shares outstanding would equal a 5% dividend and a 19-for-20 reverse split so number of shares out were the same. But dividends are so passé.

      • normm
      • normm
    • Chris

      “buying shares back pays out cash from its balance sheet, which reduces the total firm value. However, it ALSO reduces the number of shares outstanding by about the same percentage, so the price/share SHOULDN’T bounce around a lot…”

      Your point would be correct if the share price represented nothing more than ownership of the company’s assets. But as Horace pointed out, the real value of a share is its claim on future cash flows, which are independent of the number of outstanding shares. So retiring shares should increase the value of the remaining shares in a meaningful way.

      • Jasper Janssen

        In theory, the rational value of a share should be the value of current assets, plus the expected value of future performance, collectively divided by the number of outstanding shares. Using cash to buy a share back theoretically does not affect the outcome of that calculation. (Say my banana stand holds $500k cash & assets and the expected value of future sales adds up to $100k. Say there are 600 outstanding shares, so each rationally costs $1000. Now the banana stand spends 300k buying 300 shares. New situation: 200k cash, 100k future value, and 300 shares, that are still worth $1000 ea.)

        For a company, it makes sense to buy shares if it feels they’re undervalued, and to sell them if it feels they’re overvalued, just like with individual investors. It’s one of the few ways in which a company is allowed to insider-trade — they don’t have to tell the world why they think a share of Apple is worth $200 instead of the current $150, but they do know about future products that could be a reason.

      • Chris

        I stand corrected. Thanks for pointing that out. So the benefit to existing shareholders after a buyback accrues if the company is able to increase earnings, boosting the value of future cash higher than previously expected.

      • normm
      • Childermass

        You and Walt are touching on something hugely significant: the value of the cash held. The cash itself has a p/e. You can calculate it by looking at the return the cash earns in a good deposit account or in bonds. Not always the same, but roughly similar. That is the normalised earning power of the cash today. A company’s ‘earning power’ is reflected in its p/e rating. So it makes sense to buy and cancel shares when the cash is cheaper than the shares. And not when it isn’t.

        What the company ‘feels’ the p/e ought to be should not come into consideration. Rational investors want management to act rationally. They want them to cancel shares when it adds value by trading cash at a lower p/e for shares at a higher. Today. And not vice versa.

        Too many managers forget the fundamentals and play to the crowd, partly because they do not understand the variable, comparative, value of cash. And partly because they are obsessed with the share price tonight, and never tomorrow.

      • normm
      • normm
      • normm
    • normm
  • kpom

    Thanks Trump for making it easier for Apple to return cash to its owners. Including me! 😀😀

    • normm

      Before the election, everyone was advocating changing the tax laws to encourage repatriation of foreign held cash. I think this would have happened regardless.

      • A Guy

        This tax law change has very little to do with Trump, but it did take a Republican Congress. Democrats have proposed similar changes, but Republicans would never have voted for changes proposed by Democrats that lowered taxes without corresponding decreases to entitlement spending that made it deficit neutral. Since Republicans control the government, they can ignore deficit issues (or at least pretend they don’t exist). Going after entitlement spending can be pushed to later when they can blame US debt and deficits on the entitlements.

        But yes these changes have been considered highly likely in some form for quite some time (especially since tax holidays have happened in the past). Apple has been biding its time and it has paid off for Apple and its shareholders.

      • normm
      • normm
    • normm
  • RC Dolores

    It is wrong to think that cash is a liability.

    • NoiseShaper

      There exists a liability corresponding to that cash, if you will.

      The existence of the cash creates that liability, so in some way it could be seen as a liability itself.

    • normm
  • You did not mention at all that one of the reasons for buybacks (as opposed to alternatives) is the impact it then makes on EPS (earnings per share) which thereby impacts the argument between shareholders and potential shareholders.

    Good summary overall however, much love. A part two on the above frankly could merit it’s own post and would be a rabbit hole.

  • Cal Mann

    I’m curious to know how acquiring real estate (or leasing) and building lots of new Apple stores looks from an investment return perspective. I’d also like to know if increasing employee salaries and benefits is a worthwhile use of cash.

    • NoiseShaper

      The Apple Stores are spectacularly profitable – as far as I’m aware they’re the most profitable retail businesses in existence.

      Employee S&B seem to be decent, but not spectacular (and I guess that the relation to the local cost of living has something to do with how satisfied the employees will be).

  • Tapash Majumder

    What if there is a hypothetical successful company that never pays any dividend but keeps repurchasing and retiring shares? Is that better for shareholders? I offer a contrarian view.

    The only way a shareholder will generate any income from this hypothetical company is by selling shares. He is perpetually at the mercy of the market. We know that market is not always (mostly) irrational. Thank about P/E for AMZN vs AAPL.

    On the other hand if the company pays healthy dividends the shareholder is always rewarded and is not at the mercy of the market.

  • Matt C

    I plan on owning that last share after the company has bought back all the rest 😉

    • Space Gorilla

      Good plan, you’ll have to fight a few of us for it I think 🙂

      • nuvector

        The trick is to own the last two of three shares so you have a majority stake in the business. 🙂

      • Space Gorilla

        I wonder what the dividend payment would be on those two shares?

      • klahanas

        Your shares will have been sold by majority stockholder vote long before you get there…
        Do you think a person holding 3 shares can block a merger?

      • Space Gorilla

        You didn’t actually understand our silly thought exercise. Think about it for a while, majority stockholder vote, hmmm, you’ll get it… eventually.

      • klahanas

        So typical of you to assume and proclaim that I did not understand, when all I did was to highlight your silliness….

      • Space Gorilla

        The mouse hits the button and still didn’t understand the thought exercise. Try again mouse.

      • klahanas

        Okay swami…
        3 shares can be a majority if there are a maximum of 5 shares. How does one do that? It either a) starts that way b) grows to 5 c) reduces to 5.

        Considering that Apple’s outstanding shares are best represented in scientific notation, your “gedanken experiment” is not even meaningless, because you would need 51% of current outstanding shares, with future reverse stock splits, to come close to what your saying.

        Argue with math…

      • Space Gorilla

        You still don’t get it. In the thought experiment I or nuvector or Horace, or whoever wins the fight to the death! would own 66 percent (and change) of the shares. It’ll never happen, which is why it’s silly, but in a fun way, which you don’t understand because you are a miserable troll.

      • klahanas

        Like I said, it was meaningless and not even interesting.

      • Space Gorilla

        Yes, for someone as grumpy and miserable as you that would be a natural way to view a fun silly thought experiment.

      • klahanas

        But I did understand it you presumed I didn’t, or is it assumed…..
        Nah, I’ll put this on you. You presumed.

      • Space Gorilla

        And that’s 100 comments on this article. Thanks for playing mouse.

      • klahanas

        I can go all day…

        Edit: But for the sake of others, we should stop…

      • klahanas

        Just pointing out the silliness…

  • V So

    I’d like to view this excellent article as a test for investment and finance IQ. Well done Horace as always.

  • iwod

    I dont quite understand why Cash is a IOU to shareholders.
    I dont own the Cash in the Company, I own the Company ( partly ). Shouldn’t Apple be making a much better use of its Cash rather then just giving it back to me?

    I also dont understand why Cash is a liability.
    Say Apple thought long and hard and everything from super iPhone, Apple Car or what ever product they could dream of, dont require one tenth of its money, but they could have keep it for future in case ( in Steve Jobs’ Word ) they have some big ideas, and or have the courage to try many new things.

    Another Example, doesn’t Apple earn a small % on its cash? If it had $200B earning 1% per year. that is extra $2B raw profit. ( If we assume the operation expenses to manage these cash are zero, but in the grand view of things it really is negligible. )

    Could Apple not have pre paid its lease? Or Invest in Apple Store’s Property in the long term such as buying them? From the last time I checked, even if Apple decided to open up additional stores of up to 1000 and brought them all it will still be relatively small amount of money, but surely does Apple’s long term goods.

    I dont know much about the Android Ecosystem, but I assume and thinks Google doesn’t have to paid any of its Android partners for Google’s default Search Engine and Maps. But Apple is enjoying an additional $3-4B raw profits thanks to search deals with Google.

    I just dont see any of these money being reflected, because I have always thought, and now as the article suggested, Apple doesn’t need that much money for its product R&D. Apple should have had enjoyed the scale of its iPhone, and earned much more money when everything else dont scale linearly with the iPhone sales number. Except we dont, margin has been literally the same year of year.

    So if we took out those Google deals, Interest from pile of cash, would Apple’s margin be down? Despite higher ASP and higher unit sales / revenues?
    Something in those logics and numbers dont make any sense to me.

    • Walt French

      Cash is an IOU in the sense that the company is run for the benefit of the shareholders. If the company doesn’t have plans to use it, or even want to keep open a likely option to use it in a future acquisition, etc., the company implicitly should pay it out.

      Double-entry accounting sometimes makes for strange realizations. But also, for insights not otherwise available. All shareholders wants their companies to be more valuable (makes for higher price on that day when you cash out & buy a yacht or otherwise retire from working), but just leaving it in cash often suggests the management just wants to be powerful & able to justify higher compensation.

    • NoiseShaper

      There aren’t that many investment opportunities better than the most profitable, most valuable company on the planet which could also soak up a significant portion of Apple’s cash. On this scale that is actually a consideration.

      And as far as I’m aware, Apple actually does outright own at least some of its Apple Store buildings.

      • ksec

        Thanks. I have been thinking on this topic for some time and suddenly a word pops up, I remember one of the key investment and decision in Apple is “Asset Less” approach. They dont want to have asset, hence they delayed their Datacentre building for as long as it was, they dont want to own every Apple Store.

        They want less Asset on their balance sheet. I wonder why is that a good approach.

  • Mike Le Page

    Great article! But as an aside, I think that graph quite neatly answers the question: “How did Apple change following Mr Jobs passing? (Oct 2011)”