Shareholders: Is Apple using your money wisely?

Apple Online Store“We’d all like to invest as successfully as the legendary Warren Buffett. He calculates return on invested capital (ROIC) to help determine whether a company has an economic moat — the ability to earn returns on its money beyond that money’s cost,” Jim Royal writes for The Motley Fool.

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“ROIC is perhaps the most important metric in value investing,” Royal writes. “By determining a company’s ROIC, you can see how well it’s using the cash you entrust to it, and whether it’s actually creating value for you. Simply put, ROIC divides a company’s operating profit by how the amount of investment it took to get that profit.”

“Ultimately, we’re looking for companies that can invest their money at rates that are higher than the cost of capital, which for most businesses lands between 8% and 12%,” Royal writes. “Ideally, we want to see ROIC greater than 12%, at minimum… Let’s look at Apple and two of its industry peers to see how efficiently they use capital.”

Royal writes, “While Apple and Dell clearly meet our 12% threshold for attractiveness, they have consistently reduced their return on capital over time. That’s a hardly a real reason to worry, however, given their significant levels of ROIC.”

Read more in the full article here.

22 Comments

  1. Apple is doing just fine, Thank You and does not need to pay out a dividend. Buying other companies, especially big ones runs the risk of US & EU anti-trust and competitiveness troubles.
    Apple is growing the right way, from within, and through small acquisitions. Big mergers rarely pan out, as corporate cultures do not always mix well.

  2. They are doing just fine with our money. It was only ten years ago, when Apple lost money in a quarter. Apple’s leadership hasn’t forgotten the lean periods and that is a good thing. Everything is a cycle and great times never last forever. They will need the cash to make the right business decision or acquisition. But it will be in their time.

  3. Until we hit inflation….I say, horde as much cash as you can. When we start to hit inflation…start buying. But really, what should Apple do with the CASH they have….what is worth buying right now?

  4. That’s only one way of looking at it. I invest in AAPL because they consistently put out excellent quality product that fill a need or niche. So in that regard, yes, they are doing fine by me.

  5. Yes, even though the ROIC has dropped recently, that is still a great return. My bank is offering less than 1% at the moment. (A dividend is a red herring – it doesn’t affect the ROIC). As for what they could use some M&A cash for – am I the only one who thinks that Mobile Me is a bit lame? And so is iWorks.com. It would be really useful to have the work I do on the iPad automatically in an editable online form, like Google Docs. Could Apple be planning that in Maiden?

  6. If you think Apple’s business sucks…then yes, having an excessive amount of cash on hand is a good idea.

    However, if you believe in Apple’s business, you’d like your investment in Apple stock to be about investing in Apple’s business as much as possible and not have 30% of it being an investment in cash which is getting a VERY LOW return.

    That’s what he’s writing about here.

    @Ritman,
    “It was only ten years ago, when Apple lost money in a quarter. Apple’s leadership hasn’t forgotten the lean periods and that is a good thing.”

    I think a lot of people are doing this here. They’re confusing “what we want for Apple” and “what the owners should want”. “We” as in fans and customers may want Apple to always survive and be prepared for the toughest of storms “Never again the pre-Jobs era!” and all that.

    However, as an investor, while having some pool of cash to fall back on, re-organize, make investments, etc… is prudent, the last thing an investor in Apple wants is for Apple to *need* $45B+. The owners of the company shouldn’t want the management team to have the freedom to lose that much of their money.

    Or for that matter, invest the money in an unwise way. That much cash on hand gives the management the ability to invest in things the owners may not want…for that matter sitting as cash with a low yield is enough to meet that criteria, but also think of management becoming unfocused on something they may want and might not be in the interest of the owners to pursue…think of Microsoft trying to acquire Yahoo. While the owners can block such a move, they can’t stop the management before the damage is done.

    It’s all pretty simple really. The owners of Apple want:
    1) The ability to invest in Apple’s business instead of a much lower yielding investment in cash.
    2) The ability to have legitimate checks and balances with management, the board and stockholders. Believe it or not, Jobs can, and very much *has* made mistakes.
    3) Guidance on what Apple intends to do with the cash. If they intend to keep $50B, or X% of Market Cap, that’s fine, but provide that guidance. Inform the owners of the company what the plans are for when the cash on hand exceeds the amount the management feels is appropriate.
    4) Figure out where to put the cash so that it returns a yield greater than what it is now. The cash return is so low that Apple could easily buy companies and hold them as completely independent entities and get a much higher return…Adobe comes to mind.

    As it stands now, the cash on hand is good for Jobs and his team, but not good for the owners of the company. For us as customers, we’d probably benefit from some specific acquisitions. I, for one, would love to see Apple purchase Adobe…both from a stock holder perspective and from a customer perspective.

  7. Your posit above ASSumes that Apple is not investing its cash and marketable securities at anything above low-yielding and highly conservative investments. But do you have specific facts to support your assertion? Do you know specifically how Apple is investing its cash? Without these specific details, your argument stands on weak legs, if it stands at all.

    Warren Buffett realized the tremendous potential of using the cash “float” of funds from his insurance operations, and has legendarily invested this to generate tremendous returns. It could well be that Apple is actually quite adroit in the investment of its free cash to generate strong returns, which in many cases could do better invested in a market return than in buying a business or creating a product or service. But what both of us lack are the details. For this reason, I won’t make assumptions and won’t argue that Apple is using these funds unwisely. We just don’t know.

    That said, if ROIC shown above for Apple is any yardstick when compared with similar companies (Dell and HP), then the company is indeed investing its free cash wisely.

    Please don’t assume. If you have facts to present, I’ll gladly listen.

  8. @macslut

    Your comments prove that ‘owners’ don’t all agree and don’t all want the same thing. I, too, am an owner and I am very happy for Apple to hang on to that cash. Buffet has the same policy and I’m a happy owner of Berkshire Hathaway as well. Surplus cash doesn’t have to be used all the time. But it is there if need be. Meanwhile we are still getting stellar ROIC from the core business. Talking about the return Apple is getting on its cash pile is irrelevant. Cash NEVER yields 50%, and precious few companies – the targets of any M&A – do either. Whatever it is used for it is likely to be dilutive, unless and until the right deal comes along.

    Owners are not uniform, they are not a coherent body. And they most certainly are not management. We invest in a business and if we feel management is destroying value we get to sell. We do not get to dictate policy.

  9. @Childermass,

    “Your comments prove that ‘owners’ don’t all agree and don’t all want the same thing.”

    Look closer at what I wrote: “what the owners should want”

    “Talking about the return Apple is getting on its cash pile is irrelevant. Cash NEVER yields 50%, and precious few companies – the targets of any M&A – do either.”

    It’s not irrelevant when you factor the cost of the cash in the price of the stock. However an undeniable fact is that Apple’s business and the business of plenty of other companies Apple could take over have continuously exceeded the yield percentage of cash for some considerable time now.

    So given a choice…where would you like to invest your money?
    1) In Apple’s business over the next 2 years?
    2) Invested in cash?

    Do you believe Apple’s business is going to suck so bad over the next 2 years that you’re better off investing in cash? If so, why not invest elsewhere? If you believe in Apple’s business, why do you want Apple to take 30% of your investment and take it out of Apple’s business and put it into cash? You could do that yourself.

  10. Remember..
    There is a difference between Investors who:

    — invest in Apple and want the company to grow in the long term.

    and

    -invest in companies to get the most return now, who cares what happens to the company in the long term, as long as they get they money, NOW, quick.

    Just a thought.

    en

  11. @@MacSlut,

    “Your posit above ASSumes that Apple is not investing its cash and marketable securities at anything above low-yielding and highly conservative investments.”…”Please don’t assume. If you have facts to present, I’ll gladly listen.”

    Here you go:
    “”Prevailing returns on cash are very low, destroying shareholder value,” Sacconaghi wrote, noting that Apple earned 0.76% interest on its cash reserves, far lower than the return on its stock price.”
    http://www.marketwatch.com/story/apple-should-return-some-cash-bernstein-analyst-2010-08-12

    Yes, it’s getting a return on its cash. Yes, there was a time when it was getting more of a return on its cash than it was its business. Yes, Apple should have a cash reserve. However, the amount of cash it has on hand now is grossly excessive and the return is FAR lower than that on its actual business.

  12. @ElderNorm,

    It’s not a question of instant gratification for many calling on Apple to reduce its cash. In many cases, its just the opposite. Sure, some are calling for quick dividends, but most aren’t.

    Long term, the excessive cash on hand is actually holding AAPL back in terms of stock growth.

    These people are calling on Apple to get rid of the excess cash so that when they buy Apple’s stock, they can invest in Apple’s business.

  13. @macslut

    Yes, you did say what owners should want. But I don’t agree with you and you have no monopoly on how a business should handle cash. You are wrong about what this holder should want.

    Efficient use of cash is a hoary old debating point that seems to have divided the investment world for ever. I am a ‘keep a big pile just in case’ kind of a guy. So I like what Apple are doing. Those who prefer technical cash efficiency may choose not to like it.

    ‘Cash efficiency’ is, for me, in a direct line of descent from leveraged debt and that is what just sank a lot of perfectly good businesses.

    By the way, in what way is the ‘cost of the cash’ priced into Apple’s stock?

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