Apple’s $137 Billion Question

Does the technology giant have too much money? Daniel Gross reports.

You can never be too thin, or too rich. Unless, apparently, you’re a very large American corporation like Apple.

“It has a cash problem,” hedge-fund manager David Einhorn told CNBC on Thursday, speaking of Apple. Einhorn, the activist investor who gained fame and fortune by shorting Lehman Brothers in 2008, caused a stir by publicly calling on Apple to share some of its massive cash hoard with investors. “Apple has $145 per share of cash on its balance sheet,” Einhorn wrote in a letter to shareholders. “As a shareholder, this is your money.” Einhorn suggested a bit of financial engineering that would allow Apple to shovel some of its offshore cash into the pockets of shareholders like him without necessarily incurring the large tax liabilities associated with repatriating capital.

The question has taken on some urgency because the company’s stock has fallen by nearly one third in the past few months, wiping out about $250 billion of shareholder value. Apple said it would consider it.

Here’s the troubling chart of Apple’s stock over the past six months:

Now, Apple does indeed have a huge amount of cash: $137 billion, and growing rapidly because it is an insanely profitable company. (It added $23 billion in the most recent quarter.) Apple last year instituted a dividend that amounts to $10.60 per share, or about 2.3 percent of its current price.

Two factors help explain this mentality. The stockpiling of cash is part of a posttraumatic stress disorder that U.S. companies that have suffered near-death experiences frequently suffer from. If you go through a period where people are writing off your prospects, when there are questions about the ability to pay bills, when lenders evaporate into thin air, you’re likely to overcompensate by stuffing cash under the mattress. Executives at such companies vow never to get caught short again. That has happened to Apple on more than one occasion. Einhorn compared Apple to his “Grandma Roz,” who lived through the Depression and was so focused on pinching pennies that she wouldn’t leave him messages on his answering machine to avoid having to pay for a one-minute phone call.

More broadly, it happened to corporate America at large in 2008. When the meltdown came and financial markets seized up, virtually every company—no matter how old, or how profitable, or how well connected—was shut out from borrowing. That caused a bunch of unnecessary bankruptcies and too many sleepless nights in the boardroom. In the past few years, corporate America has come roaring back. Corporate profits in the U.S. have risen to $1.83 trillion in 2011 from $1.34 trillion in 2009, and through the first three quarters of 2012 were running at an annual rate of about $1.95 trillion. Corporate cash holdings have soared as well, to more than $1.6 trillion in the middle of last year. In effect, companies from Apple on down are using cash as a form of insulation.

The second reason that Apple and corporate America have so much cash is also tied to the financial crisis—or, more accurately, to its aftermath. For the last few years, U.S. companies have been dealing with a slow-growth environment at home. In the past year, growth in emerging markets like Brazil and India has slowed as well. All of which means there is a persistent global problem of demand in many industries. Why build a new factory if the existing factory can produce all the products your customers want and you don’t think demand will be rising sharply in the near future? And why build a new factory if you don’t have a brilliant new profit-producing gizmo to make? Now, Apple is certainly investing to expand its physical footprint, with new retail stores and factories in the U.S. and abroad. But its portfolio of products is bringing in cash at a far faster rate than the company can think of to spend on new and improved products.

Again, corporate America at large suffers from the same condition. Industrial capacity—the percentage of factories that are being used—is running at about 79 percent, according to the Federal Reserve. Of course new factories are being built. But there’s enough infrastructure, thanks to shifting consumption patterns and overbuilding in the boom years. We simply don’t need a lot more malls, or coal-fired power plants, or car factories than we have now. And with demand growing slowly here, in Europe, and slowing down in India, China, and other developing markets, there’s no great sense of urgency to go out and invest.

On the one hand, the cash hoarding is a sign of health. Plenty of companies keeled over and died in 2008 and 2009 because they hadn’t saved for a rainy day. But as the financial crisis recedes, others are arguing that the corporate desire to hold on to cash, and the reluctance to share it with investors, workers, and counterparts, is now a problem. As Paul Krugman notes, companies that hoard cash are essentially short-changing their workers, who would be far more likely to spend the money domestically.

Investors are perfectly happy for companies to keep cash in the corporate treasury rather than pay it out to workers. But they’re not pleased about the prospect of the cash just sitting there. In times like these, cash is trash—as anybody with a savings account knows, money parked in short-term savings instruments yields next to nothing. It just sits there. It doesn’t earn much of a return for a company, it isn’t being invested in companies, products, or factories designed to produce even more cash in the future. If Apple doesn’t know what to do with its money, the reasoning goes, perhaps its future growth prospects are limited.

Einhorn’s contention is that Apple’s stock is suffering precisely because of the surfeit of idle money. Were the company to figure out a way to pay a larger dividend, or follow his plan to issue new interest-bearing securities to shareholders, Apple would instantly make the stock more valuable. People would buy the shares not just because of the hope of future appreciation, but because they would be able to tap into the pool of capital sitting in Palo Alto.

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Will Apple suddenly junk its Depression-era mentality and start to part with its cash? It’s doubtful. Einhorn owns only a tiny fraction of Apple’s stock. In the history of the stock market, there are very few examples of activist shareholders pushing around companies with market capitalizations of $440 billion. And while a higher effective dividend yield may attract a class of new investors (whose eagerness to buy the stock would push Apple’s stock up), the concession that it can’t think of anything better to do with the money might repel existing investors (whose eagerness to sell would push Apple’s stock down).

Regardless of how it is resolved, the tug of war over Apple’s billions highlights a strange conundrum. In America, it turns out, it is possible to have too much money.