Qualcomm & Apple's Cash Distortion. Will Rising Interest Rates Create a New Bank
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Qualcomm (NASDAQ: QCOM) announced pretty good earnings but fessed up to probable delays in delivering chip sets for Apple's (NASDAQ: AAPL) brand spanking new G5 iPhone causing the market to sell off in classic knee jerk reactionary mode. Take a look at something else on Qualcomm's balance sheet. Cash and marketable securities now clock in at around $26 billion which equates to 25% of their market value. The cash is starting to be so big it needs to start doing some heavy lifting. So if you believe interest rates are poised to start increasing, which I do, a new strategic new source of income is about to manifest.
Can you see a 2% increase in yield on cash and marketables. Sure no problem as long as Qualcomm is not a long bond investor which it isn't. The 2% increase kicks out $520 million in EBITDA. Looking at it another way it`s about 12% of last years earnings. 12% for risk free and near effort free return. If the cash and marketable securities portfolio cannot yield an extra 2% in a rising interest rate environment then the whole cash position strategy will come into question.
Speaking of Apple who drinks very similar cool-aide to Qualcomm, they have a similar cash and marketable position, about $26 billion. But the two market caps are wildly different. Much has been made of Apples king of the world market cap. Qualcomm comes in at a very pedestrian $100 Billion give or take. An extra $520 million effort less risk free at Apple will not be kicked out of bed. But it just will not have the same impact relatively speaking.
Pressure will build for both to deploy cash more productively. As yields rise investors will be able to find better uses for cash. Currently cash held directly by investors or held in corporate bank accounts of investments do not yield much. Therefore the pressure to do something clever is near non existent. The pressure for cleverness will grow as interest rates rise and cash loses it's commodity value and becomes capital again.
The cash distortion masks the transition from commodity to capital. Each firm will have an implicit cost of capital. Investors will expect the cost to be covered. It defies reason to suggest that cash will hurdle a firms cost of capital. Cash has had such a low yield that it has not driven EPS to any great extent. Large cash positions with increasing yields will challenge the firms business model. This will create much embarassment for incumbent managers. Marginal operations will be under closer scrutiny. New ventures will be launched with shorter time lines. Just as large investment funds are not paid to hold cash, corporations will feel the same pressures. What Qualcomm, Apple and others can do absent a large strategic venture, is to pay out dividends, buy back shares, or some combination of both and ultimately reduce the cash distortion.
The unfinished hidden agenda becomes the taxation of profits from non US operations. If and when political leaders realize the folly of double taxation, the US domiciled investor, both individual as well as institutional, will benefit with cold hard cash in hand which is hard to beat.
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