Apple’s “active talks” about returning some of its more than $137 billion in cash has remained just that, with the company so far not announcing any plans to return its hoard to investors in the form of buybacks or dividends. But that may not necessarily be a bad thing, says one analyst who thinks the delay in announcing new cash-back programs could signal that CEO Tim Cook and the board are planning something big as part of a series of announcements to help revive the stock.
“Apple has announced that it is examining returning more of its $137 billion in cash to shareholders and has held widespread discussions with investors to gather input on the topic,” said Toni Sacconaghi of Sanford C. Bernstein & Co. in a report today. “In doing so, it has created an expectation that it is likely to materially increase the amount of cash it returns.”
While Apple’s cash piles up, its shares have plummeted to last week's close of $429.80 from a record $702.10 in September on concerns that profit margins are being squeezed and that new products – including an update to the iPhone expected later this year -- might not be revolutionary enough to stem the tide of defections to rival smartphones from Samsung. The iPhone is Apple’s biggest moneymaker, accounting for half of sales.
The company announced its first buyback and dividend program just over a year ago when it had almost $100 billion in cash, prompting speculation that it might announce new programs before the end of March. After hedge fund manage David Einhorn of Greenlight Capital put forward a proposal for special preferred shares, Apple issued a statement on Feb. 7 saying the company is “ in the fortunate position of continuing to generate large amounts of cash, including $23 billion in cash flow from operations in the last quarter alone… Apple’s management team and Board of Directors have been in active discussions about returning additional cash to shareholders. As part of our review, we will thoroughly evaluate Greenlight Capital’s current proposal to issue some form of preferred stock. We welcome Greenlight’s views and the views of all of our shareholders.”
Sacconaghi now expects news about the return in the weeks after Apple reports its second-quarter earnings on April 23. “A cash announcement following earnings would allow estimates to be reset and potentially pave the way for a series of positive news flow announcements for Apple, including cash return and new products.”
“We believe that last year's cash announcement was relatively straightforward — Apple effectively decided to return most of its US generated cash, but such a decision did not impact its existing cash balance or offshore generated cash," Sacconaghi said. "This time around – if Apple is going to return materially more cash to shareholders – it will need to consider drawing down U.S. cash balances, taking on debt, or potentially paying cash tax on offshore earnings, all of which make its decision more complicated than last year's.”
Several analysts have called for Apple to take advantage of low-interest rates and take on debt to fund its cash back programs. That way, the Cupertino, California-based company wouldn’t have to tap into its overseas cash, which stands at more than $94 billion. Bringing that cash home would require that Apple pay a 35 percent repatriation tax.
Sacconaghi said his thinking about debt as the best option hasn’t changed. What has changed, he believes, is Apple's attitude about debt, with the company now “increasingly open to the concept of debt, which represents a major change in mindset.” Here's Sacconaghi's proposal.
“In order to return materially more cash to investors on a sustained basis, Apple will either need to take on debt and/or pay the tax on offshore cash. Our belief is that Apple appears increasingly likely to issue debt. Currently, Apple holds $137B in cash on its balance sheet. We estimate that Apple will generate about $44B in FCF in FY2013 – about 30% of which (or roughly $13B) is generated onshore. Today, Apple is essentially returning to shareholders all of its onshore cash generation ($10B in annual dividends, and $3.3B in share repurchases from its announced 3-year, $10B repurchase plan). The remaining ~$30B+ in cash is accruing to Apple's balance sheet. Accordingly, in order to return more cash to shareholders on an ongoing basis, Apple can draw down its current US cash balance (which at $43B is ample, but not sustainable), but more likely, it will need to take on debt, or pay taxes on its offshore cash. Our conversations with investors who have met in person with Apple executives this quarter suggest that Apple has become increasingly open to the concept of debt, which represents a major change in mindset from November, when CFO Peter Oppenheimer told us1 that taking on debt was highly unlikely except for something "strategic." We have long advocated that taking on debt makes eminent sense for Apple, given today's prevailing rate environment and Apple's strong credit rating.”
