Three Reasons Apple’s Cash Reserves Are Overrated

Apple Inc. (NASDAQ:AAPL) stock price is in a nose dive, probably shouting ‘Mayday! May day!’ but the crowd is watching the jet show and still cheering because they think that it has $137.1 billion cash reserves to save it; ‘Apple will spend a little here and a little there and it will be back up again’.

The point I’m trying to make is that stocks don’t get this much support merely from cash reserves especially when they are in overseas deposits.

Apple Inc. (NASDAQ:AAPL) is not the king company any more, it has slumped from being the biggest corporation of the world to second spot. After the latest earnings announcement Apple’s market capitalization is approximately $413 billion, chasing Exxon Mobil Corporation (NYSE:XOM), which is now the biggest company with a market capitalization of $418.23 billion (at the time of this writing).

Right before its earnings were announced its share  price was trading at $514.01 and the moment earnings went public, the stock went down 14%, and now it’s trading somewhere in the 400s.

So the question becomes more important than ever; what is the true value of Apple inc. (NASDAQ:AAPL)’s cash and what is the probable use of such cash this year?

Three Reasons Apple’s Cash Reserves are overrated  

a) Apple Inc. (NASDAQ:AAPL) has most of its cash ($94 billion) parked in countries with low tax rates but if they want to use it for acquisitions in the U.S. or for buybacks (maybe dividends) they’ll have to pay 35% which takes off a large chunk of their cash pile.

b) The fact that they have so much cash building up but can’t deploy it is in many ways a bad sign and could bring the stock down further.

c) Cash does support stock price but not completely. Due to slow growth rate, a stock sometimes trades even below cash (an extremely rare situation).

In short, the overseas cash won’t be worth its number if Apple brings it home. For instance Apple stock needs ‘great’ news (good won’t be good enough for the tech giant) to regain it price, so the experts consider 2013 an important year – Apple will probably buy a firm(s) to get the horsepower back into its portfolio. But once they bring home the cash from the ‘other side’, the grass won’t be that green when it gets scorched under the tax sun.

A huge difference exists in what Apple pays in terms of taxes now and what it would be paying if the money is brought back to the U.S. At the moment it is paying around 2% in terms of taxes, whereas U.S. tax law cuts 35% (35% tax cut figure is an average, corporate tax rate varies from state to state). Based on last September report, The Guardian published an article that Apple paid $713 million taxes on a profit of $36.87 billion, which is only 1.9%.

With the recent downward stock performance and disappointing sales, the pressure on Apple is on to impress their investors. Apple plans to spend $45 billion in the next three years on share buyback initiatives but according to Forbes’ Eric Savitz, it’s not as impressive as it sounds. Apple raised $16 billion in December quarter alone, so what Apple can impress Wall Street with is if they spend $45 billion in shares buyback in the next couple of quarters instead of three years.

A Quick Dividend Yield Comparison

In comparison Apple Inc. (NASDAQ:AAPL) pays a lower dividend, about $2.65, which in yield terms is about 2.3%. It’s less than the likes of HP (3.1%), Microsoft (3.33%) and Intel (4.3%). According to CFO Peter Oppenheimer, Apple has paid out $4.5 billion in terms of dividends and stock repurchases in recent quarter, and now the company is considering increasing both.

I’m not trying to make Apple look like a low dividend paying company, even if they are, they won’t be bothered by what others pay their shareholders. Apple operates differently, call it their unique way or their financial situation (where majority of their cash is overseas).

On a second note, overseas cash can’t be an excuse for low dividend yield. Microsoft Corporation (NASDAQ:MSFT) pays 3.33% dividend while 87% of its treasure is buried in foreign soil, shielding it from U.S. tax cuts. I know there can’t be ‘Apples to Micro’ comparison, both companies have their reasons, but right now Apple needs to spend on its investors (even if they decide not to bring cash in the US, they still have their $45 billion at home).

According to Abhey Lamba, a Mizuho Securities analyst, investors can expect a 10% increase in Apple’s current payout. But the cash used for this will probably not be from their foreign reserves. My guess is that they will focus more on the profits from iPads and iPhone sales, which has been predicted by analysts to soar – their demand is still huge.

Brian White of Topeka Capital Markets projects that by 2015, Apple will have somewhere around $250 billion in cash reserves, calling the company a “cash gusher”. In an interview with Bloomberg Businessweek, Tim Cook said that Apple’s cash reserve is being managed by “the most conservative investments known to man” and that he is in favor of distributing the funds.

Apple Inc. (NASDAQ:AAPL) can’t count on its ‘unusable’ cash reserves as a constant stock support, eventually people will understand company’s situation about its usage. This year they are expected to upgrade their web services, possibly an indication of buying a social platform like Twitter but how they carry out the cash transaction, is a big question – the impact on stock price can be devastating. For the foreseeable future, Apple’s wealth overseas will keep on growing. There is a good chance that Apple Inc. (NASDAQ:AAPL) will become more of an overseas entity because of small cash available in the U.S.