Apple's Corporate Culture Might Not Allow Carl Icahn's $150 Billion Payout Suggestion

Carl Icahn is suggesting that Apple should have a $ 150 billion buyback of stock and an increased dividend payout over the next few years. It's certainly technically and financially feasible for Apple to do this but I have a feeling that the internal corporate culture of the company will be very much against it. It might even be a sensible thing for the company to do, to hand that cash back to shareholders, but as I say I expect there to be great reluctance among the executives to make it happen.

Connie Guglielmo has the news:

Activist investor Carl Icahn met with Apple CEO Tim Cook over dinner last night to press the company to do an additional $150 billion share buyback, and said he will going to continue pushing the issue when the two talk again in three weeks.

“Had a cordial dinner with Tim last night,” Icahn, chairman of Icahn Enterprises, said in a Twitter post this morning. “We pushed hard for a 150 billion buyback. We decided to continue dialogue in about three weeks.”

There's no doubt that Apple could afford such a distribution to shareholders. The company has nearly $150 billion in cash on its books (OK, including near cash equivalents like T-bills etc) and it most certainly doesn't need all of that to finance ongoing operations. Nor to invest in new products either: this cash pile is around and about the current inflation adjusted cost of the entire Moon landings program after all.

There is a slight problem in that a good $100 billion of this cash pile is offshore which leads us into the tax problem. As long as Apple keeps that money offshore then it's not liable for US corporate income tax. If it brings it onshore to finance a dividend or stock buybacks (as it would have to bring it onshore to do so) then it would have to pay that tax, minus whatever foreign profits tax has already been applied. And given that Apple's foreign corporate tax rate is something under 2%, the US corporate tax is 35% as a headline rate then that would take a pretty big chunk out of the cash pile.

So, as Icahn himself suggests the company could borrow the money in the US to pay out to the shareholders. As indeed Apple did borrow to finance the current distribution: and it got very good rates indeed on its borrowing.

There's several good reasons why such a distribution should happen, in theory at least. The first being that it is the shareholders' money so why shouldn't they have it? The second being that it makes many investors nervous when they see management with quite that much cash  lying around. There's all sorts of silly things that people can end up doing with internally held cash. Buy entirely inappropriate firms at startlingly high valuations for example (the examples in the tech space are myriad and it's not just Microsoft that has done so). The third being that Apple's not actually getting that much of a return on that cash pile. Short term interest rates really are not very high and the yield on Apple's own stock is (or was, yesterday) 2.3%. That's almost certainly higher than what they're getting on their short term US $ investments at present.

Essentially what Icahn is suggesting is that Apple should have a higher gearing and there's no real problem with that at all.

However, there's one little bit of history that makes me think that Apple won't be so keen on the idea. Companies do have institutional cultures and I'm sure that Apple's has been shaped in part by their near bankruptcy only 15 years or so ago. Back in the late 90s, before the return of Jobs, the company did nearly go under. Microsoft invested $150 million (how small that sum now seems in comparison to the Apple of today) nominally to make sure that there would still be versions of Microsoft software for the Mac. But pretty much everyone thinks it was a vital cash lifeline to allow Apple to survive. This is a purely personal opinion but I do think that the management of Apple will have that still in the corporate memory. And while they might well accept the intellectual case, outlined above, for cutting back on the cash mountain and putting the company onto a more normal gearing between equity and debt, I'm not sure that they'll buy it instinctively. My contention is that the near death experience makes them very comfortable indeed with having a fat cash margin in between them and the possibility of it ever happening again.

Please note that this doesn't mean that they won't come to an agreement with Icahn, nor that they will not boost the distribution. It does mean though that I think that if they do then they'll extend the timescale of it, so that the increased distribution comes from that future positive cash flow rather than entirely removing their current net positive cash position. Both sides would be able to declare this as a victory and that always is a positive for any solution to a disagreement.