Apple’s cash pile - The tech giant should give cash back to shareholders

This is counter-intuitive because a strategist would tell you that companies with more cash have more options, companies with less cash have to go through all the expense of going back to the market every time they need to make capital investments.

One thing that turns out to be the factor is agency costs. Companies with large cash hoards might waste money on bad or frivolous projects or more often bad, overpriced acquisitions.

In apple's case they have more cash than they can reinvest in their own business. The market could get better returns on that cash than apple can. Therefore the market will value the cash on Apple's books at discount to it's true value. The cash is discounted by apple's low sub-market rate of return on that capital and by the implicit risk that management might any day choose to do something dumb with it.

Instead companies that have to go to the market more often to raise cash, that have to file more prospectuses, turn out to be more transparently run and more accountable to shareholders. In the long run managers who "have to open the kimono" more often, turn out to perform better for shareholders.

When Microsoft announced the first huge one time dividend in 2003 or whenever it was, something funny happened. When they transferred X billion dollars to shareholders, their stock should also have dropped by exactly X billion dollars reflecting the value transferred out of the company. Instead their market cap only declined by 0.8X. Meaning than hundreds of millions of dollars of shareholder value was created out of nowhere. This was because the cash was worth that much more to shareholders who had a use for it than in the of microsoft who couldn't do anything with useful with it.

The 0.2X was the implicit discount of the value of that cash on MSFT's books that was unlocked by setting it free.

In fact because dividends are hard to take back, a dividend usual signals to the market that management have confidence in future earnings growth. Stocks usually jump on dividend announcements even though theoretically it shouldn't make a difference. That's the signalling effect.

*the big caveat being that APPL famously never performs or does anything exactly like an average company.

Because the board members have a fiduciary duty towards their shareholders. If the company literally has more cash than it knows what to do with, then it is imposing the opportunity cost of that non-use upon its shareholders. Either invest it in something with a high risk/reward potential (and accept the consequences if that investment fails), or return it to shareholders in the form of dividends or a share buyback. If the cash is just sitting in the bank doing nothing then you're paying Apple's management a fat fee for something you could equally well be doing yourself. Large, unused piles of cash are a drag upon the economy.

Regular dividends provide a fundamental baseline in the value of a stock, and market pressures typically force movement of stock price to normalize the dividend yield. It provides stability for stocks no longer driven by growth and speculation.

AAPL has been a massive growth story for the last decade. But as with any growth story, at some point fundamental limits are reached. I'm not saying that has happened now, but when it does (as it did for Microsoft), Apple will be forced to choose between issuing dividends or watching their share price fall (and, worst case scenario, spiral) as growth speculators sell off their portfolios.

Company has a stock price of $X and lets say a billion outstanding shares. Giving it a 'market cap' of $X * 1e9 or $x billion dollars. It has cash or cash equivalents of $Y billion.

If you try to buy control of the company by buying up all the shares is costs more than $X billion because as you buy shares the price will go up. But you can mitigate that by borrowing up to Y billion dollars that you will 'pay back' by looting the coffers and paying it back.

Now as long as your share price stays high, this is not a huge threat, but there are many, many examples of high tech companies whose share price was very high at one point, and nearly worthless a short while later. Look at Sun as an example $60 -> $1 in the course of about 4 years. So if you price plummets precipitously and you can't 'get rid' of your excess cash, well you end up on some corporate raider's dessert plate.

But corporate raiding aside (while it makes for great drama its not the best reason) the money in 'cash' isn't doing anything for Apple. Its not researching some useful thing, optimizing some operational expense, reducing risk or eliminating barriers to future growth.

Sure having "enough" cash is very important, but having "too much" can be dangerous, foolish, or both.

A companies goal is to maximize shareholder value. If they aren't using the cash it's not maximizing shareholder value.

AMD/ATI might be nice at $5b would be good for the chip tech, but would probably have serious problems with Intel and a lot of PC industry. NVIDIA at $9 would be interesting.

Adobe at $16b has been a rumor favorite. It would probably be a buy-it and then spin off / sell a lot of the enterprise facing parts to someone else.

1) expect to pay a premium over cap

The cash held by Apple is built in to its share price. If a stock holder wants some of that all they have to do is sell some shares. Undoubtably there are some tax considerations regarding capital gains vs. dividends but the fact remains that if Apple distributed a significant amount of its cash to shareholders, then the share price would inevitably drop by the same amount.