“Apple has a $130-billon problem, and it could impact the company’s stock down the line,” Tiernan Ray writes for Barron’s. “The tech giant has said it plans to reduce its net cash position to zero, a process that could take several years to address. The question is what happens then, and what happens on the way to that event?”
“A very large acquisition seems unlikely for Apple, which has never done huge deals. Hence, the reduction of Apple’s cash will likely happen through buying back stock and paying dividends, as has been its practice,” Ray writes. “A vexing trade-off may face Apple: some investors might want more cash sooner, but that would hasten the inevitable — the arrival of a day when Apple doesn’t have as much money to spend on buybacks and dividends.”
“Come 2023, will investors balk at an Apple suddenly less generous with its capital returns?” Ray writes. “And if Apple puts off that day as much as possible, plodding along with no significant increase in capital returns, will it lose the support of those fickle buyers hungry for shares with meaningful dividend buyback increases every year?”
“Shebly Seyrafi, who follows the company for FBN Securities, explains the math. Apple’s capital return program is running at about $100 billion annually, as he sees it. The company is probably going to generate about $70 billion in free cash flow this year,” Ray writes. “If Apple spends all its free cash flow on buybacks and dividends, that implies another $30 billion drawdown of gross cash. Divide $130 billion in net cash by a drawdown of $30 billion annually, and it would take just over four years to burn off the balance.”
Read more in the full article here.
MacDailyNews Take: Regardless of what happens next, as Ray writes, Apple is still a buy for many investors because of the flood of buybacks to come over the coming years.
The outlook also fails to account for new products and services (Apple Glasses, autonomous vehicles, original content streaming etc.) that could dramatically alter the math.
We’ll possibly get a hint of things to come when Apple updates its capital returns program this spring.
Apple cash neutral: Smart capital allocation or corporate gimmick? – March 14, 2018
What ‘cash neutral’ means to Apple shareholders – February 22, 2018
UBS: How Apple could get to zero net cash – February 14, 2018