Thursday, February 25, 2010

The Pile of Cash at Apple

At the Apple shareholder meeting, Steve Jobs declared that he has no intention of using the company's giant cash balances (nearly $25 billion) to pay dividends to shareholders. Instead, he hopes to use that cash to fuel future investments.

Now, in most situations, I would be highly skeptical of a firm hoarding this amount of cash. I would be concerned that a CEO might use the cash to pursue a variety of value-destroying diversification strategies, or other profit-damaging initiatives. In Apple's case, though, I'm more willing to allow the company to hold these types of cash reserves. Why? In the end, the question for shareholders is this: Does the company have a sufficient amount of net present value positive projects in which it can invest this cash? If not, then the shareholders should be demanding dividends. They would want the cash so that they can invest it more productively on their own. However, if the firm does appear to have some very promising net present value projects in which to invest, then we would be much more comfortable letting the cash remain within the firm. To some extent, the best way to answer this question is to look at the firm's recent track record. Is it growing? Is it innovating? Is it delivering solid returns on investment? In Apple's case, they have a great track record of making sound investments that deliver profitable innovations. Their markets and products do not appear mature. It would seem reasonable to believe that Jobs and his team can use the cash very productively. Of course, though, that assessment needs to be updated continually as conditions change.

1 comment:

Luke Bornheimer said...

If one is to examine Apple's recent history and investments, it is clear that they make BIG moves that are VERY VERY cautious to enter markets that are good, but not great.

Of note, Apple's COO, Tim Cook, earlier this week at a Goldman Sachs conference, when explaining how the company avoids hubris (overbearing pride or presumption), said:

"We are the most focused company that I know of or have read of or have any knowledge of. We say no to good ideas every day. We say no to great ideas in order to keep the amount of things we focus on very small in number so that we can put enormous energy behind the ones we do choose."

To read my additional thoughts on Apple's 'pile of cash', check out my post here: