“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.
I love metrics.
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.
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.
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?
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.
Maybe Apple should use some cash to buy VMWare…
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?
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.
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.
@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.
@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.
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
@@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.
@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.
@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?
Apple is a company that thrives on innovation which is a risky position. They are constantly battling patent and trademark lawsuits and will likely lose a few some day. A stockpile of cash will preserve the company, and the stock, from a freefall based on bad news. Also, that huge pile of cash seems to have a strategic effect. Their competitors often overspend on acquisitions because they want to grab things before Apple does.
@@MacSlut
“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?”
Cash and cash equivalents such as money markets and government bonds that mature within three months are by definition low yielding. If your thinking that the cash is invested in something more high paying like stocks or bonds then it wouldn’t be called cash on the balance sheet, it would be called marketable securities, and no one would be complaining.
@Childermass
“You are wrong about what this holder should want”
As an investor one should want to maximize the the return on their investment. That’s not me yielding a monopoly position, that’s simply the definition of the term.
“I am a ‘keep a big pile just in case’ kind of a guy.”
That’s fine. Why do you invest in Apple at all then? Why not put all of your money in the bank and be happy with that? At what point do you find Apple’s low return on the amount of cash acceptable? Should Apple have $100 Billion in cash? $200 Billion? Should it represent 50% of its market cap? 75%? More???
“‘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. “
We’re far from talking about debt here. It’s not about cashing out, but rather not keeping an excessive amount of cash with a low return…and no guidance. You know what also sank a lot of perfectly good companies? Blowing their cash on poor investment, many that weren’t in the best interest of their core business.
“By the way, in what way is the ‘cost of the cash’ priced into Apple’s stock?”
Right now, their market cap is based on how the market values Apple. This is based partially on the amount of cash on hand. Usually, you can roughly back the cash out of the market cap and get a good perspective on how the market values the company’s business.
You can’t really do that with Apple right now because there’s too much cash. If you back the cash out, you’d find Apple waaay undervalued from a P/E perspective. However, as long as Apple holds on to the cash, that’s not going to perform the same relative to its business so the market will respond by undervaluing the company.
Right now there’s $45 Billion in cash with a market cap of $222 Billion. There’s a P/E ratio of 18.3. The P/E ratio is out of whack because the company is growing so rapidly, so investors are looking at future earnings. However, those are being offset because while Apple’s business is growing rapidly, the return on the cash is not.
Think of it this way…
Apple’s business is going to continue to grow rapidly…except for 20% of it which will suck as an investment. That 20% is projected to grow to 30% over the next 2 years, but it will continue to suck as an investment. The more Apple’s business contributes to the cash hoard, the more the percentage of it will suck as an investment.
I am an owner of Apple stock (2001) & continue to invest in the company. Apple has used the cash wisely and it has been no secret that they have and continue to build a pile of liquid assets. If you did your homework before buying you would have known that. All Wall Street wants is for Apple to drop that money in their lap via stock buyback, dividend or some expensive M&A
@macslut
“So long as Apple hangs on to its cash … the market will respond by undervaluing the company”.
Good. So now I buy some more at a bargain price.
Really – you should think through what you write.
You might also want to bear in mind that the world is not monochrome.
I trust Jobs, more than me or any “expert” posting on mdn with what apple should do with it’s money. As a shareholder i’m doing perfectly fine without dividends, buybacks or whatever.
@Re MacSlut,
“Apple has used the cash wisely”
No they haven’t. That’s just the point. They’re getting a 0.76% yield on the cash which is FAR lower than pretty much anything else they could have done with the cash
“it has been no secret that they have and continue to build a pile of liquid assets. If you did your homework before buying you would have known that.”
Who’s saying this is new information? Nobody is complaining that this is a surprise or a secret. At issue is now the amount of cash has become excessive and Apple’s management isn’t now providing any guidance on what it intends to do with the cash.
“All Wall Street wants is for Apple to drop that money in their lap via stock buyback, dividend or some expensive M&A”
It’s not about big bad Wall Street. It’s about the owners of Apple knowing what management intends to do, and having their investment be in Apple’s business and not sitting in cash earning a 0.76% yield.
@Childermass,
“”So long as Apple hangs on to its cash … the market will respond by undervaluing the company”. Good. So now I buy some more at a bargain price.”
You’re not thinking this through. If you buy Apple stock today, only 80% of it will be in Apple’s business. 20% of it will be in cash getting 0.76% interest. In 2 years, 30% of your investment will be in cash getting about the same yield while only 70% will be in Apple’s business. The amount of your investment that’s getting a 0.76% yield increases and increases at a growing rate over time.
As an investor, specifically one who invests in a stock with no dividends, you don’t care so much about the price of the stock as compared to the growth in the stock. If a stock is $1 this year and $4 next year, you’ve quadrupled your money. If a stock is $2 this year and $1 of it is based on the value of the cash on hand per share, and the stock goes up to $4, you’ve only doubled your money. Still great, but not as good as if you could have invested only in the business and not also in the $1 of cash that did nothing (next to nothing at .76%).
@investor joe,
“I trust Jobs, more than me or any “expert” posting on mdn with what apple should do with it’s money.”
This isn’t me versus the opinion of Jobs as to what’s in the best interest of the owners of the company. Hell, if Jobs were to answer honestly, he’d agree that what’s in his interest and that of the executive team aren’t always aligned with the owners of the company. Not to mention the fact that Jobs has been known to make some serious mistakes from time to time.
The idea that Apple has an excessive cash hoard doesn’t come from me, some random MDN commenter, but from numerous credible people who are either impartial or writing on behalf of the interests of the owners of the company.
This amount of excessive cash on hand and the lack of guidance does not benefit the shareholders. Withholding guidance may benefit the management team, and make investors nervous/angry.
“As a shareholder i’m doing perfectly fine without dividends, buybacks or whatever.”
Remember when Apple used to double in market cap? Do you think it’s going to continue to do that when 20-30% of it is only returning 0.76%?
Question for the 3 of you…I’ve asked and nobody seems willing to answer this, but at what point do you think too much cash is excessive? At what point do you think Apple’s business doesn’t suck and could yield more than 0.76%? If you don’t think 30% is excessive, what about 50%, 75%, 90%…is there a point where you don’t mind all of your investment in Apple yielding 0.76%?
Apple’s business is much better than that.