3 Things Media Pundits Must Stop Saying About Apple
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The media is full of misconceptions about Apple's (NASDAQ: AAPL) $137 billion cash pile. Let me drill into these one-by-one.
Apple's cash hurts shareholders
There's a big concern that the market might be discounting Apple's cash. There're only two reasons why this might happen:
Management Waste: Investors believe management might squander investor capital on overpriced acquisitions, bad investments, or frivolous side projects. This doesn't seem likely. Apple has a great acquisition track record and remarkable ability to create shareholder value.
Poor Returns: The cash could be invested in securities that earn returns lower than the risk-free rate. Given that Apple's cash balance is invested in exchange traded securities like T-Bills and commercial paper, this doesn't seem probable either.
Another concern investors raise is that Apple's large cash balance reduces shareholder returns. This is technically true. Greenbacks sitting in a vault earn less than 1%. But investors must keep in mind that holding cash also reduces Apple's risk. A large balance isn't good or bad for shareholders, it's neutral.
Apple should make a big acquisition
Every armchair CEO in the blogosphere is throwing around names about who Apple should acquire.
Jim Cramer has suggested Apple buy Netflix (NASDAQ: NFLX). Such a deal would give Apple access to a valuable distribution platform and content for the rumored launched of the company's iTV. Apple could easily digest such a purchase because Netflix's market capitalization is relatively small at $10 billion.
Pundits have been throwing around other targets like Twitter, Electronic Arts, Disney, Facebook, and Intel.
Big acquisitions have a long history of destroying shareholder value as they're usually overpriced and only serve to satisfy the egos of executives.
There're few examples of companies that have grown successfully through acquisitions Take Hewlett-Packard (NYSE: HPQ) for example. The company has blown billions of dollars in shareholder wealth on soured deals; $1.2 billion on Palm, $8.8 billion on Autonomy, $8.0 billion on Electronic Data Systems. Today, Hewlett-Packard has a $40 billion market capitalization, less than the $61 billion spent on acquisitions since 2001.
Apple's current strategy, in contrast, has been remarkably successful. The company buys small firms with great talent and puts them to work on Apple projects.
Apple should leverage up
There's a perception on Wall Street that Apple isn't properly capitalized. By tinkering with the balance sheet in an excel spreadsheet, pundits believe Apple could unlock billions of dollars.
Barclays recently proposed the company issue $50-$100 billion in debt to finance a big dividend or share buyback. By financing the company with debt, Apple could reduce its cost of capital and create value for shareholders.
But a large debt issue would impair Apple's long term viability. By straddling the company with a big fixed obligation, Apple would loose flexibility needed to respond to the next industry shift.
Selling bonds would also only have a minimal impact on the stock. Some analysts estimate a $50 billion debt issue would only provide a 5%-10% share price pop. Hardly enough to justify jeopardizing the company's future.
Foolish bottom line
I agree with Warren Buffett's advice to Apple management:
- Return excess cash to shareholders through a simple buyback program.
- Focus on creating shareholder value through enhancing operations.
- Don't try to manage the share price day-to-day.
Given Tim Cook's attitude to Wall Street's crazy proposals, I think he understands this already.
Robert Baillieul has no position in any stocks mentioned. The Motley Fool recommends Apple and Netflix. The Motley Fool owns shares of Apple and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!