April 30, 2018

Breakingviews: Apple May Double Capital Returned To Investors

by Breakingviews.

Memories of Apple nearly going bankrupt in the mid-1990s scared Steve Jobs and his colleagues. Now worth some $840 billion, it has kept an absurdly conservative balance sheet for two decades. Apple returned about $50 billion to shareholders last fiscal year through share buybacks and dividends. Yet the company, whose free cash flow more than replenishes that every year, still had over $160 billion of net cash last quarter. Doubling the payout for three years would still leave current boss Tim Cook with all the cash he needs.U.S. tax law created another balance-sheet distortion. Overseas profit was sheltered from American taxes, and because most of Apple’s cash – an eye-watering $285 billion at the end of 2017 – was held offshore, it was cheaper to borrow than repatriate it. The company has $122 billion of debt outstanding, issued largely to pay for buybacks and dividends. December’s changes to corporate tax means Apple must pay $38 billion over eight years but gets access to all its cash.

Apple’s chief financial officer, Luca Maestri, said during the last earnings call that Apple will eventually hold equal debt and cash on its balance sheet. Suppose the company aims to get there over three years. It should generate some $165 billion of free cash flow, after capital expenditures, over the rest of the year to September 2018 and the following two fiscal years, according to estimates compiled by Thomson Reuters.

At the $50 billion pace of buybacks and dividends seen last year, the company would shell out about $135 billion more to investors over the same period. Assume a minimal $5 billion for M&A, given Apple is famously averse to big deals – the biggest it has ever done is $3 billion for Beats in 2014. Add $14 billion of tax installments. Sum it all up, and the company would still increase its cash pile by more than $10 billion, boosting net cash above $170 billion – and that’s assuming no debt repayment.

Apple needed less than $30 billion tied up in working capital at the end of 2017. That means increasing buybacks or dividends by $50 billion in each of the next three years is feasible, in theory. Debt markets are always an option, too. Investors, waiting to hear Apple’s plans when it reports earnings on Tuesday, may be in for a flood of cash.

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