James Moore: Once Apple's numbers are crunched, there's really not a lot to celebrate

 

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Outlook On the face of it, Apple’s performance could scarcely have been sweeter for its shareholders. Having smashed analysts’ forecasts to produce a record first-quarter profit, driven by the spectacular success of the latest iPhones, it had commentators lining up to pay fulsome tribute to a company that has become an American icon. And to Tim Cook, the man charting that company’s course. Surely, anything less than a hearty three cheers would be churlish? Unfortunately, the question that continues to dog Apple is what happens to all the cash that its iPhones, Macs, apps and iPads throw off (although the slowing sales of the latter provided one of its few disappointments). The answer is not very much, at least when it comes to making a return.

Let’s look at the numbers. You may have seen reports about Apple’s cash pile reaching an astonishing £178bn, and there are all sorts of entertaining figures knocking about to illustrate what that means in practice. Mine is that Apple’s Braeburn Capital (which looks after its mountain of money and is based in Reno, Nevada, where there is no capital gains or corporation tax to pay) makes it into the list of the world’s top 100 asset managers despite boasting just one client.

Of course, to call that $178bn a “cash pile” is a bit of a misnomer. At the end of the company’s financial first quarter on 27 December, there was $19.5bn of actual cash – up from $13.8bn three months earlier. Another $13bn of the money mountain was held in short-term investments ($11.2bn) with the remaining $145.5bn in longer-term securities ($130.2bn). You might expect that, given the whiz kids Apple typically hires, it would be getting a pretty sweet return on those investments, no? Well, you might be surprised. If Apple was a bank, it would be the apple of even the most risk-averse regulator’s eyes.

Apple’s margins on its sales of Macs, Apps, iPods and (especially) iPhones have hit nearly 40 per cent. Super sweet! However, last year it declared interest and dividend income of just $1.8bn, and said the weighted average interest rate earned on its cash, cash equivalents and marketable securities was a pitiful 1.1 per cent. That was actually an improvement on the previous year’s 1.03 per cent. Rotten!

Of course, there are reasons for this. Apple’s investment philosophy is ultra-conservative and that makes for a high credit rating. So while the interest Apple makes on its money is pitiful, the amount it has to pay to borrow is similarly small. Back in 2013, in fact, it paid the lowest coupon on record for a three-year issue – just 0.45 per cent. It is under such pressure from shareholders, most notably Carl Icahn, that it has taken to borrowing money in the US to fund returns of cash for shareholders, largely through buybacks, although the dividend has been steadily increasing, too. That is because the vast majority of its cash is held overseas in low-tax jurisdictions. Uncle Sam would therefore take a hefty chunk of anything it tried to bring back.

But even after its borrowings ($35bn at the year-end), the cash and investments net of that stood at a still substantial $120bn and have since increased again.

With all that being the case, shareholders like Mr Icahn make a rather good point when they suggest that they could make better use of at least some of the funds that Apple currently sits on than Apple can itself. Ditto for US taxpayers, not to mention all those in Europe who lose out thanks to its Irish arrangements.

When you spend a bit of time crunching the numbers, it looks as if there is less to celebrate than it might at first seem. Even though I’m a fan of Apple’s products, I’m afraid that I’m with the churls.

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