Apple and the Cash Finesse

Yesterday, we learned how Carl Icahn, a hedge-fund investor with a mere 0.52% of Apple’s shares, was successful in getting the attention of Apple’s Board of Directors. In response to Icahn and related media attention, Apple promised to distribute $100 billion to shareholders. How did it go about this?

Apple’s plan involved a combination of dividends and share repurchases. Dividends are just cash payments to all shareholders, say $3.00 per share. Share repurchases are more interesting. In a share repurchase, a company goes to the stock market and places a buy order for its own shares. What this does is allow all shareholders the opportunity to cash out their shares at the market price.

What’s different about share repurchases, compared to dividends, is that share repurchases give shareholders the option of whether to participate. All Apple shareholders got dividends whether they wanted them or not. With a share repurchase, you could hang onto your shares or you could exchange them for some of Apple’s cash, it was entirely your choice.

A beautiful thing, almost like democracy, but for rich people.

The hiccup

There was only one problem. Apple’s cash wasn’t all sitting in a bank in the US. Much of it was sitting in other countries. The United States has a rule for American companies, that if you want to bring the money from foreign earnings back to the United States, you have to pay American tax rates on it. According to Apple CEO Tim Cook, that would mean paying the American government 40% of any money it brought home.

This was a real problem for Apple, because the only thing Apple likes more than great new products is not paying taxes. In fact, Apple has been accused of being one of the biggest tax dodgers on the planet. It has gone to extraordinary lengths to avoid paying taxes. Apple is not the only company to do this, but it is certainly among the largest and most profitable. I’ll write about Apple’s tax avoidance schemes tomorrow, but for now, suffice to say that Apple would rather do anything than pay taxes on its cash.

The Finesse

So, rather than repatriate the cash it needed to pay dividends and buy back shares, Apple borrowed the money. That’s right. Apple, with billions of dollars of unused cash, borrowed money from banks and other lenders and gave the borrowed money to its shareholders.

Only in an Alice in Wonderland sort of world does this make sense.

Here is how it went down:

  • Apple started paying dividends at the end of fiscal 2012, to the tune of $2.4 billion.
  • It started borrowing in 2013, drawing in almost $17 billion in long-term debt and paying out $10.5 billion in dividends. It also bought back almost $23 billion of its own shares.
  • In 2014, it borrowed another $12 billion, paid $11 billion in dividends and repurchased an even $45 billion in shares.
  • In 2015, it borrowed over $27 billion, paid $11.5 billion in dividends and repurchased $35 billion in shares.

So, Apple has solved its excess cash problem, right? Well, it solved its Carl Icahn problem. Icahn cashed out when he saw Apple’s iPhone sales drop for the first time ever, in the third quarter of fiscal 2015. Meanwhile, Apple now has over $64 billion in debt, after paying $35 billion in dividends and more than $100 billion to repurchase its shares.

And the cash? Well, as I’ve mentioned previously, it now sits at $206 billion. When Apple started addressing its excess cash problem, in 2012, the cash total, including all its marketable securities, was $121 billion. Even taking into account its new debt, Apple’s cash problem has got worse.

Cash vs. Debt at Apple

"Cash" includes marketable securities. "Debt" includes commercial paper. In billions of US$.

Next up, I’ll talk in more detail about Apple and its tax avoidance schemes. Here’s a teaser: I have begun to wonder if the smartest people at Apple still work in the product development labs.


Photos of Northern Ireland's side of the Giant's Causeway, and of the grotto under Dunluce Castle, taken in 2014.