Apple Inc. (NASDAQ:AAPL): Putting The Company’s $122 Billion Wad Of Cash Into Perspective
Jason Cimpl: Apple Inc. (NASDAQ:AAPL) could purchase just about anything with its $122 billion wad of cash. In fact, the company has the ability to double its yield right now without even breaking a sweat. It holds that much in cash.
Apple’s cash hoard is enough buy all of the gold reportedly stockpiled in the People’s Republic of China. Moreover, they could even afford to sweeten the deal and pay $1,900 per ounce.
At $1,900 per ounce, gold sells for $61.1 million per ton. China supposedly stores about 1,054 tons of gold, which has a value of roughly $64.3 billion.
Apple could purchase all of PRC’s gold (for a 10% premium) and have $58 billion remaining.
It’s unlikely the company will begin to hoard gold. However, Apple’s cash balance has clearly reached an absurd level.
The easiest (and wisest) way for Apple to spend its money would be to distribute it as a dividend. Though AAPL already yields a respectable 1.8%, its payout could be far grander. And I think Apple is going to increase their payout next quarter. Here are three reasons why.
First, when Apple initially announced its dividend in March – the first since 1995 – the company had more than $97 billion in cash. It seemed to have begun the program because management didn’t know what else to do with the funds – a little shareholder pressure likely helped, too.
As of September, Apple boasted more than $122 billion in cash and equivalents, amounting to an additional $25 billion more than it had available to distribute in March.
As Apple’s products became more popular, its cash balance ballooned. The company simply cannot spend nearly as much money as it brings in.
Apple currently dishes out around $10 billion in dividends each year. Because their cash balance has grown by more than $25 billion in two quarters, management will increase the dividend next year or declare a special one-time distribution to benefit high tax bracket payers in 2012.
Second, bond yields are incredibly low. The low yield creates a problem for baby boomers looking to generate investment income. Accordingly, many of those investors have flooded into traditional high-yield groups – such as consumer staples, utilities or REITs – as alternatives to owning bonds. Other companies have taken note, too.
The number of S&P 500 companies paying a dividend is the highest since 1999, hitting 403 earlier in the year. Moreover, many of the new dividend payers are major technology companies – including Apple and NVIDIA. Also, analysts expect that third-quarter distributions will be 20% higher than last year despite sluggish earnings growth.
Companies understand that as investors rush into high-yield stocks, they push the valuation higher. In order to stay competitive and support their stock, management teams will look to initiate or raise dividends more aggressively than in the past. That’s why dividends have increased even though earnings have not. Apple pays out only 24% of its net profit, so it has plenty of leeway to increase its distributions at a rate that exceeds other companies.
Finally, Apple is a fast-growing technology company. It isn’t a utility, REIT or from some other slow-growing industry that’s notorious for high yields. Admittedly, Apple’s growth is slowing. But it’s not slow, at least compared to utilities and REITs.
Analysts expect Apple’s EPS to grow 11.7% this year and by 17.6% next year, amounting to more than $95 billion in income over two years. That amount of income could push the company’s cash balance to $210 billion in 2014. More importantly, the earnings growth would provide the company with an extra $12 billion. If Apple’s management only maintained their current payout ratio on the $12 billion, it would be enough to raise dividends per share by $3.
Though AAPL yields 1.8%, this amount should be higher. The company has $25 billion more than it had in March. And every additional $1 billion is enough to raise dividends by $1 per share. Also, many companies are expanding on current dividend programs. In order to stay attractive, Apple must outpace the competition. Lastly, the company is a growing business that will generate a higher income every year. Shareholders should expect Apple’s dividend distributions to grow at least as much as earnings do.
Apple continues to be my favorite stock. That’s why I want to pass along some exciting Apple research I have been working on. Members of my premiere stock service, Top Stock Insights, purchased AAPL at just the right time and are now sitting on massive gains.