Why Apple is growing its bank account

“While Samsung does make a good sum of money and have had record quarters over the past few years, their marketing budget is astronomically high,” Ben Bajarin writes for Tech.Pinions. “Samsung has a nearly limitless bank account. Samsung, like LG, is backed by their nation state of South Korea.”

“So is Huawei, and of course several other Chinese ODMs, who are also backed by their nation state,” Bajarin writes. “When there is a guarantee of a cash trove behind you, it is possible to make business decisions that perhaps other companies without such a wealthy backer would make. In essence the rules for spending may simply be different for a company like Samsung and other Asian OEMs / ODMs who have nation state backing.”

Bajarin writes, “With this backdrop in mind I propose a theory. Perhaps Apple is building its bank account, which is now estimated at about $150 billion with this competitive point in mind. Apple has no guarantee from their nation state who will keep them in business if all goes down the tubes where a number of their competitors do have this guarantee.”

Read more in the full article here.

33 Comments

  1. That’s gotta be a the dumbest damn thing I ever heard. Is it the stupidity of other countries that is going to make Apple spend their money? This makes no sense at all… Go write something else please. Thank You.

    1. Sorry Dan, economic theory points well towards this being a reasonable argument. While the specific aspect of nation backing may be a little off, the overall theory that Apple is building its cash to insulate it from the actions of competitors and the market is more than reasonable and, more importantly, rational.

      1. Apple almost went out of business at one point even if the fanboys don’t want to admit it. No company is immune from a bad streak that could sink them and Apple knows this from experience. It makes sense that Apple is intent on putting itself in a position that it will be able to weather any storm that might come in the future or be able to take advantage of someone else’s failure.

        Every company has it’s ups and downs. Apple will have it’s downs again.

        1. Isn’t Apple going through its “downs” right now? I’m hoping this can’t be its “ups”. Apple has been beaten down enough over the past year.

      2. I agree. Global economic downturns/recessions are a fact of life.

        Recent history shows that France and Germany backed EADS, the U.S. backed both GM and Chrysler. The U.S. and the EU bailed out their banks. Many more examples.

        Apple is wise in building a cash hoard domestically and off-shore. After all, markets and governments can wildly fluctuate. Deep pockets go a long way to smoothing out the turbulence of current events.

        1. You could also think of it like building up an enormous chest of trust. Eventually, people will say, “ok you’ve been awesome for a while and weathered all the storms. Now you can do something big.”

  2. I honestly can’t imagine a scenario where this would happen except for a world war. It would take years for Apple to burn through $150 billion and that’s if it weren’t selling any products at all. Besides, Apple could always stop giving dividends and start firing employees to slow the burn rate.

    If something like a world war were to happen, then wouldn’t most other American companies go under being how they don’t have massive reserve cash hoards. Anyway, South Korea doesn’t exactly have an unlimited supply of cash because their economy isn’t all that bulletproof. And if the North Korean Army suddenly started streaming into Seoul they might as well forget about Samsung staying in business.

    I know we keep talking about Apple’s cash hoard, but with $100 billion sitting overseas, Apple would take a pretty big hit to bring it back to the U.S. From my viewpoint that $100 billion is really just going to waste. Apple should at least be using it for overseas projects that could generate more revenue than just stashing it in a bank (if that’s what they are actually doing with it).

  3. Perhaps Apple (and other large western corporations) should ask their governments why they voted to allow China into the World Trade Organization when it is clear that they have no intention to have their companies play on a level playing field.

  4. Apple – or more accurately, Jobs – started accumulating that cash to be free of Wall St. interference. Why do you think he rarely took one on one meetings with hedge fund managers, investment banks, etc… ? Especially after the company began rocketing up in profitability?

    No doubt that Korean, Japanese, Chinese, and European companies enjoy a larger degree of direct support from their host governments. That’s simply because their host governments haven’t completely sold themselves to their financial sectors, and still accept how important indigenous manufacturing and technology growth is (and of course the employment & well paying jobs that go with them).

    But in this country, Wall St. is in charge of sacrificing all those things on the alter of the dollar/oil paradigm, and off shoring jobs from America. And the government they own is on board with that program. So there is no real backing given to companies here that don’t/won’t toe that line (or any other the tag team duo comes up with).

    Jobs understood who his real enemy was. Cook still doesn’t seem to get it. For every good plan we here of (for example, domestic manufacturing of Apple products again), there’s always a debt financed stock buyback to worry about, or another lunch with Carl ‘iCon’.

    That money is important, but not for the purposes of dealing with Samsung during an economic downturn. For dealing with Goldman Sachs as they CAUSE that down turn is more like it.

    1. “Apple – or more accurately, Jobs – started accumulating that cash to be free of Wall St. interference.”

      Well, that was dumb… although probably not true.

      Jobs started over-accumulating cash because he and the rest of the executive team didn’t want to deal with it. The especially didn’t want to take over big companies. The executive team wanted (and still wants) to be a small focused company. They say this all the time.

      They got a pass from investors for a long time because growth kept skyrocketing as was the the stock price.

      However, now that the stock isn’t skyrocketing, investors are putting more pressure on Apple. As such, they’re looking at anything that is under-performing and asking for change. Fortunately, the only business unit at Apple that is under-performing is the cash. The return Apple gets on the cash is incredibly low compared to the rest of the company.

      Because of this, Apple has a depressed PE ratio, which makes it more attractive to investors like Icahn who see Apple as an opportunity to buy in at an artificially low stock price, put pressure on the company to do something with the cash that yields an immediate return to investors and then exit leaving Apple’s stock to be based more directly on the business of Apple rather than tied to bazillions of dollars of cash.

      1. Wait, BILLIONS of accumulated dollars simply because they “didn’t want to deal with it”??

        You may not realize how “dumb” that sounds, but it’s a doozy.

        Your rational for why Apple execs haven’t given away all that money to stockholders from the beginning is that they just were too lazy, or not smart enough. And that is ridiculous. In fact it sounds like the rational of someone with the same disposition as the Carl Icahns of the world. In other words a parasite.

        Enjoy the natural growth of your stock holdings, and when you need some money cash them in. It’s like walking away from the blackjack table when your ahead – you don’t own the table, and you don’t own the casino just because you bought some chips. You made a bet, it worked out, now stop trying to weasel more money out of the deal. Go get a real job if you want more money than gambling can give you.

        And stop insulting the intelligence of people who read this site.

        1. Your reading comprehension isn’t that great here, so let me be clear… In no way am I saying that anyone was lazy, however one does not simply pull out their checkbook to disperse over a hundred billion dollars (and growing rapidly) located in accounts all over the world.

          The facts are that Apple hired executive level management and firms with teams of members, from accountants and lawyers to financial strategists and lobbyists to handle this. It was, and continues to represent a major unit at Apple.

          Jobs and the executive team prior to hiring had no real experience with any of this. I don’t know why you would think he, or they, would.

          Almost all of the executive team is on record as not wanting to take over everything and become a super-mega corporation.

          So the team focused on doing what they do best… Creating new iPhones, iPads and other magic, while the cash continued to flood in at ever increasing numbers.

          Go back and listen to the archives of the financial conference calls and read the earnings reports. Match up what they’re saying to the release of information of financial hires and firms being contracted. You’ll hear them specifically say that they aren’t planning on making big wasteful purchases and plan on bringing people in to develop a plan for the cash… Later followed by them saying they are developing plans, and later followed by actually seeing them spend money on lobbying for cash repatriation reform.

          I don’t particularly like or trust Icahn, but I was on this site for a long time, and blogged elsewhere that eventually Apple would issue dividends and perhaps stock buy back. I was correct, and I believe Apple will do this again.

          Apple’s pile of cash will always be high as long as the business continues to thrive. As Apple grows, especially in foreign markets, the cash will be increasingly out of line as compared to other companies and increasingly poor performing in terms of the yield on the cash compared to Apple’s other business units. This is just naturally to be expected and I’m not advocating anything to the contrary.

          However, if cash repatriation laws change or windows open up, Apple will likely take advantage of those opportunities and cash may end up being dispersed at a higher rate.

          The bottom line though is that Apple is now equipped to deal with the increase in cash flow and we’re unlikely to see runaway cash piling like we did a couple of years ago, especially with the incredibly low yields.

          I’m not defending Icahn here, as I dislike the man, but dispensing cash through dividends isn’t necessarily greedy or parasitic. It’s the natural order for a company focused on one business once it starts to become saturated in that business. Apple could sit on that cash with a low yield or be pushed beyond the saturation of the business. It’s better to let the stock settle at a price and let the cash flow through to the investors rather than push the company further until it collapses. Not all of the cash… A hundred billion or more is a nice bank. This creates stability.

          1. “I’m not defending Icahn here, as I dislike the man, but dispensing cash through dividends isn’t necessarily greedy or parasitic. It’s the natural order for a company focused on one business once it starts to become saturated in that business.”

            You may not be defending Icahn, but you are defending what he wants, and logically that amounts to the same thing, in this instance. Further, there’s nothing natural about a company earning money through the labor and brains of it’s employees and management, turning around and giving it to people who simply bet on the stock price going up. It may be legal, it may also be expected in some quarters, but that’s only because the system – a non-organic system, invented by humans, and thus not natural in any sense – allows it to be done.

            A more ‘natural’ outcome would be for the winning bettors to take their gains by cashing in the stock, if it’s cash flow they are after, and letting the people at Apple use the money they earned to either invest in future product, invest in or acquire new businesses, or disperse it to Apple employees & management throughout the company (i.e. those who are the REAL investors in the company – investors of their time, labor, brains, & skill).

            Stock owners demanding anything more than a well-performing stock are greedy and parasitic, at best, because they have done absolutely nothing to earn anything more than what a rising stock price has already done for them.

            One last thing before moving on:

            “… Apple could sit on that cash with a low yield or be pushed beyond the saturation of the business. It’s better to let the stock settle at a price and let the cash flow through to the investors rather than push the company further until it collapses. Not all of the cash… A hundred billion or more is a nice bank. This creates stability.”

            The stock started ‘settling’ (i.e. dropping) BEFORE Apple began the dividend program, and the screams for even more of a dividend AND a buyback only got louder – so much so that Cook gave in, again, and gave the bettors what they wanted.

            Has any of that helped the stock price? Is it somehow more ‘stable’ than before the dividend/buyback giveaways? Clearly no, and no.

            Apple – any manufacturing company – does better when it holds onto it’s earnings. It provides interest free liquidity and independence of action whenever a company needs it. It allows bigger bonuses and pay to the people in the company, who earned that money for the company in the first place. Even just sitting and earning low interest on massive amounts until good aquisition and/or investment opportunities arise is a better longterm strategy for a company than whittling it away through payouts and interest payments to individuals and entities that have done nothing to earn it.

            Anyone with a desire to see an otherwise independent and healthy company continue to thrive can see the logic of it. Those looking for, again at best, even more of a ‘free ride’ than a rising stock price provides advocate for your position.

            At worst, they’re looking to bring that company down. Maybe that’s not you, but your carrying the same water.

            1. “You may not be defending Icahn, but you are defending what he wants, and logically that amounts to the same thing, in this instance. ”

              No, I’m not. You’re either not understanding what Icahn wants or what I’m saying.

              “Further, there’s nothing natural about a company earning money through the labor and brains of it’s employees and management, turning around and giving it to people who simply bet on the stock price going up.”

              In a capitalist system, there are those who provide the working capital for a company. Don’t make this sound as if Apple employees being under-compensated or taken advantage of for their work is the issue here, it’s not. If you feel that they are, well then that’s a separate debate as opposed to what Apple should do with hundreds of billions of dollars.

              “It may be legal, it may also be expected in some quarters, but that’s only because the system – a non-organic system, invented by humans, and thus not natural in any sense – allows it to be done.”

              You’re turning this into a semantical argument. It’s not. It’s “natural” in the sense that this is how the system in which we live, the system we’ve set up and accepted functions. It’s natural in the sense that if those who provide working capital for a company aren’t given a return for their investment, the system will collapse as nobody would have any incentive to provide capital. Yes, the system works the same way for employees, they must be properly paid, or else the company can’t attract talented employees, but again, unless you’re saying that Apple has a problem attracting talented employees to the tune of it being a hundreds of billions of dollars of a problem, it’s then natural for the shareholders of the company to seek a return on the investment.

              You might ask about the fact that the current shareholders of the company are those who bought the stock and not those that provided the initial capital. And that’s right, but those who provided the initial capital sold to those that bought the future return and the system works its way through subsequent sales.

              “A more ‘natural’ outcome would be for the winning bettors to take their gains by cashing in the stock”

              The problem with this is that if the only way to get a return on the investment of a stock is to sell the stock, then there is no reason to buy the stock other than to bet that the stock will raise in value despite never getting a return in of itself. However, with no return on the stock in terms of a dividend, there is no reason for anyone to invest instead of make a bet on an arbitrary and unrelated measurement of the business.

              “if it’s cash flow they are after, and letting the people at Apple use the money they earned to either invest in future product, invest in or acquire new businesses”

              This is how businesses collapse under their own success. First, I’m not advocating that any amount of the money shouldn’t be used if needed to fund future projects or acquisitions. My opposition is for the money to be pressured into being to used for such things when management doesn’t want to (as they’ve repeated stated), or used for a field where they have no interest or experience. This kills many companies and is unnatural.

              A business should grow to the apex of natural growth and not to the point where managers are overwhelmed by everything that the mega-corp now does, or where margins shrink because the company is spread too thin, or the company is now competing with itself, or where the core business and core competency of the company is now a minority part of the business.

              “Or disperse it to Apple employees & management throughout the company (i.e. those who are the REAL investors in the company – investors of their time, labor, brains, & skill).”

              Maybe they could burn the money in a bonfire while they all hold hands and sing Kumbaya?

              Again, if Apple needs to spend more money on employees that’s great, use the money for whatever Apple needs as a business. However, when there are hundreds of billions of dollars about to be piled up, the shareholders of the company will inevitably need to be compensated. Again, take this away, and have the stock market solely be a betting game, and there becomes no working capital for companies.

              “Stock owners demanding anything more than a well-performing stock are greedy and parasitic, at best, because they have done absolutely nothing to earn anything more than what a rising stock price has already done for them.”

              The stock is only rising because the shareholders of the company are at some point going to be have a return based on hundreds of billions of dollars.

              “The stock started ‘settling’ (i.e. dropping) BEFORE Apple began the dividend program, and the screams for even more of a dividend AND a buyback only got louder – so much so that Cook gave in, again, and gave the bettors what they wanted.”

              I don’t think Cook “gave in” at all. I was here for a long time talking about how Apple would likely do a stock buy back and issue dividends at some point. My prediction was that this would happen somewhere at around 100 billion or so… depending on how big Apple was at the time (the bigger, the more cash on hand makes sense).

              Likewise, I think Cook is going to take more cash off the books. There aren’t really many other options here. Apple’s business doesn’t need it. The management doesn’t want to spend it on anything, and having it sit on the shelf with an incredibly low yield doesn’t help anyone.

              “Has any of that helped the stock price? Is it somehow more ‘stable’ than before the dividend/buyback giveaways? Clearly no, and no.”

              Yes, it has. Look, Apple could find some sort of equilibrium… say where the stock is at $X a share, cash on hand is at $100 billion, and a portion of cash above that amount is returned to shareholders in the form of dividends. Another portion of cash is then used for stock buybacks which are then used for stock grants and options for employees. Hypothetically to make this point, assume Apple is in zero growth (not positive or negative). The stock would still go up and down based on how $X provides a return in dividends relative to where $X would provide a return in other investments. Assuming that the economy was stable, $X would be stable. Assuming chaos in the economy, $X would still fluctuate, but be more stable than the overall economy. Of course Apple’s business growth would not be statically neutral, and any change in growth would be reflected as pressure in $X, but not necessarily a direct change in $X.

              IOW, there’s nothing wrong with Apple’s stock remaining at say $500 a share. In fact, if it remains $500 a share over the next 10 years, it would be a great investment, and great reward for employees in their compensation packages if the dividends on the $500 were directly connected to the cash flow.

              “Apple – any manufacturing company – does better when it holds onto it’s earnings…”

              History shows that you’re wrong. Again, I’m not talking about removing all cash, but cash above a certain level… when we’re talking about hundreds of billions of dollars, you’ll find that big acquisitions outside of an areas of a company’s core competency almost always turn out bad. Likewise, when management is pressured into spending money, it almost always turns out bad. Heck, look at Microsoft and the hundreds of billions they’ve spent acquiring businesses that they’ve abandoned or businesses that they continue to pour billions into because Balmer craved being a mega-corp.

  5. The reason why Apple has so much cash is simple. It keeps coming in at a faster rate than what they can do with it.

    The “rainy-day” fanboyism isn’t how businesses are run. If Apple ever “needs” $150 Billion in cash, then it shouldn’t be in business anymore.

    Much of the $150 Billion is overseas waiting to be brought home under favorable conditions or spent abroad when a new investment opportunity opens up.

    Domestic cash isn’t returning a good yield. I’ve been pointing that out for years… as a business unit the cash represents an under-performance for Apple and it’s in the interest of investors for Apple to do something with that money that yields a greater return… be it dividends, stock buy-back, or investments.

    The bigger Apple’s business gets, the more appropriate it is to have such a large pile of cash that is under-performing. By under-performing, I mean that it’s making interest, but very low interest and the return is much lower than Apple’s other businesses. Still, shoveling off this much cash when it keeps flooding in at a faster rate is a difficult task and takes time to figure out.

    As long as Apple isn’t doing anything stupid with the cash, like buying big business that it shouldn’t, then all will be ok.

  6. Apple is accumulating the bank account to pay off the large amount of recall claims coming there way for the 5s:
    Blue screen of death
    Crashing twice as much as 5
    Compass-gate
    There is an awful lot of FUD surrounding this device, how much is Apple going to be able to debunk?
    What is going on? How much is this going to occur with Ipad5? Is Apple not vetting there suppliers? Are they in such a hurry to innovate, they are missing the ball on quality?These will all be considered before I buy another device from “the new Apple”

  7. > Samsung, like LG, is backed by their nation state of South Korea <

    Re. State-backed, one word: Daewoo.
    It went broke.
    Korea allowed it to go broke.
    The premise of the article is that Korean companies are guaranteed by the state, which is wrong.
    The article and its conclusions are also therefore wrong.

    QED

    Actually, the vast majority of tech journalism is dishonest, worthless click-bait; ad hoc juvenile nonsense masquerading as 'analysis', served up to make money from clicks and page-views.

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