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Intro
Apple's cash management is a topic which has piqued curiosity for years now, and the company currently has $23.7B of cash sitting on its balance sheet. It also has another $24.7B in short-term investments that could be quickly converted into cash.
The question that remains is one that has persisted since the passing of Steve Jobs back in 2011. What is Apple doing with all that Cash? It was debatable whether Apple could deploy cash in a way that continues to innovate and produce above-average returns. This has been a knock against the company for the past 10+ years. So, I decided to dig in and see how Apple is doing with respect to money management.
In the last 10 years, earnings have grown at a compounded rate of 10.42% to $99.8B in 2022, which is very good. From those earnings, the level of dividends paid out to shareholders has also grown from a total of $10.6B in 2013 to $14.8B in 2022. The average Dividend Payout Ratio for the last 10 years has been about 22.7%.
Meanwhile, the level of Retained Earnings has declined from $104B in 2013 to a negative -$3B in 2022. So, has Apple's cash management been productive in practice? I thought it would be interesting to explore the key components of the net change in cash over the last 10 years. As a longtime holder of Apple stock, it will also aid in helping to determine whether Apple remains a solid money investment.
Cash Flow
Apple's excess cash has piled up largely because a lot of that cash is generated internationally. Repatriating that cash would subject it to taxation which would adversely affect returns. Rather than take the tax hit, Apple has historically preferred to hold the cash. This has resulted in huge piles accumulating on its balance sheet.
But in 2018, Apple's cash management practice began to include bringing foreign cash back to the U.S. and taking the 15.5% repatriation hit. According to Apple's balance sheet, cash and equivalents has declined in the past 5 years from a high of $49B in 2019 to the current level $24B.
Total cash and short-term investments has similarly declined to a total of $48.3B in 2022. While levels of dividends paid have increased by about 40% over the past 10 years, dividend levels have been essentially flat over the past 5 years. They've only increased about $800M during that period. Meanwhile, both Cash and Retained Earnings have declined significantly so other activities must be driving those declines. The expectation is that the company is putting that cash to good use.
The Apple brand and its distinctive products have set it apart from the competition and afforded it a true competitive advantage. It's gained a loyal following, and Apple is a cash-generating machine. It produced $122B in cash flow from operations in 2022, more than Amazon and Facebook combined. Having a durable competitive advantage, Apple has been able to use its retained earnings to either expand its operations, invest in new businesses, and/or repurchase its shares. All three of these have proven favorable and have had a positive impact on earnings.
Dividends
In the past 10 years, Apple's revenue has more than doubled from $171B in 2013 to $394B in 2022. That's an impressive level of growth for such a large company. Earnings have also grown significantly during that period, compounding at a growth rate of 10.42% and maintaining a respectable average operating margin of a 23%.
Shareholders have been rewarded with increasing levels of cash dividends paid out. Again, on average 22.7% of the company's earnings are paid out to shareholders in the last 10 years. The company's stock has also appreciated +655% over the 10 year period reflecting a 23.9% CAGR.
Acquisitions
In total, Apple has spent about $8.7B in cash on acquisitions in the past 10 years. The largest amount was $3B spent to acquire Beats in 2014. According to Engadget, that investment has already paid off as early as 2018 in the form of more paying users on the streaming side. Outside of that, Apple appears to maintain the very sensible strategy of acquiring smaller companies that can be easily absorbed and integrated without having to bother with too much excess baggage. CNBC articulates Apple's acquisition strategy as being focused on gaining technical talent such as engineers that will allow it to expand into fields or develop specific technology that could set it apart from competitors.
Capital Expenditures and R&D
Capital expenditures for Apple have totaled $107B in the last 10 years. This reflects good use of cash for investment in long-term initiatives with the expectation of impacting operations with enhanced returns.
Along the same line, Apple has shrewdly used excess cash to expand research and development activities. R&D expense has more than quadrupled in the past 10 years and more than doubled in the past 5 years. This reflects a productive use of cash and reflects good opportunity to potentially expand its breadth into new industries as well as its depth into existing industries. As a whole, management appears to be expanding efforts related to additional industries, manufacturing techniques, and processes.
Share Repurchases - a huge part of Apple's cash management
On top of the solid returns that shareholders are receiving in the form of dividends, Apple has really ramped up repurchasing its own shares. This has been the largest use of its cash. In the past 10 years, Apple has spent an average of $50B per year and a total of $582B on share repurchases. This is a very good sign and reflects Apple's durable competitive advantage and its inherent economic power. Buying its own shares reduces shareholders equity and ultimately increases future per share earnings of the investors who don't sell. Per share earnings increase, which results in an increase in the market price of the stock, which also increases wealth creation for shareholders.
If Apple had spent that same amount of money on additional dividends instead, investors would have had to pay income tax on their portion. Dividends serve to provide nice cash payouts. But share repurchases allow remaining investors a larger ownership interest in Apple without having to invest any more of their own money in it and also avoiding a tax hit. As such, the repurchase program is a key part of Apple's cash management efforts and a huge benefit to investors.
Investment Analysis
Profitability
Apple falls short versus the sector median with respect to gross profit margin. But it's clear that it's managing operating expenses very well since Apple maintains an edge in all other profit margins.
Return on Equity currently exists at a hefty 175%. This is largely due to the share repurchases that have caused a decline in the number of shares outstanding and therefore a decline in shareholders equity. Return on Equity has more than tripled in the last 5 years. Again, this is primarily driven by the share repurchases. But net earnings have also experienced a compounded growth rate of 11% in the last 5 years. So, while the share repurchases are skewing the ROE level, earnings remain strong and return on equity remains quite healthy to the benefit of shareholders.
For additional perspective, return on assets is also solid at 21.2% and return on total capital is similarly strong at 65.2%. Both have been trending up to these levels reflecting management's prowess in leveraging the company's assets and all capital resources.
Free Cash Flow and LTD
And, of course, free cash flow endures at excellent levels. It's grown at an 11.32% CAGR in the last 10 years. Long-term debt has been managed at reasonable levels, currently sitting at a total of $98.9B. That seems like quite a lot at a nominal level. But considering that Apple is generating net earnings of $99B per year, it could easily pay off its long-term debt within 1 year or less. Companies with a durable competitive advantage typically have long-term debt burdens of fewer than 5 times current net earnings.
Future Outlook
The market is apparently worried about the recent and future performance of Apple's App Store and the risk of lower-than-expected iPhone production. I believe these concerns are overblown. December 2022 data supports the first year-over-year revenue growth for the App Store in six months. And potential issues from supply chain disruptions affecting iPhone production should settle. As China is easing restrictions, Apple's key iPhone production plant in China has returned to near 90% capacity. Apple also has plans to shift more of its iPhone production to other markets such as Vietnam and India.
Apple's hardware remains hugely popular and sales in nearly all areas were at record levels in 2022. iPhone sales were up 9.7% YoY to $42.6B and sales of its iconic Mac PC were up 25% YoY to $11.5B. Neither App Store revenue nor iPhone production are long-term concerns. And its services-related revenues are making up an increasingly larger portion of the total sales. Services already makes up its second-largest segment, making up 19.5% of total revenue. And it's projected to nearly double to reach sales of more than $90B. The market's pessimism has really created opportunity to buy more Apple stock at a discount.
Conclusion
It's pretty clear that Apple's cash management is deploying cash in productive ways. While it still maintains a sizeable amount of cash and short-term investments on its balance sheet, these levels have significantly declined in the past 5 years. And the company is strategically using that cash while maintaining a healthy level to adequately cover long-term debt and operational needs.
Smaller acquisitions that can be quickly absorbed and integrated reflect sensible corporate strategy. And utilizing cash to opportunistically fund share repurchases has been huge for increasing shareholder value. Looking forward, Apple's share repurchase program will very likely continue, and its cash flow certainly can support it with no issues. Last year, the Board authorized another $90 billion for share repurchases in the years to come. The only other initiative I'd like to see is with respect to the level of innovation we saw in years past. The creation of cutting edge products like the iPod and the iPhone were revolutionary. But this type of innovation hasn't been seen since the passing of Steve Jobs.
I remain bullish on Apple. I think it's a great company in which to push more investment money for a nice dividend and a solid return on investment. It's also what I would consider to be a relatively "safe" stock investment as a large-cap, blue-chip cash-generating machine. The forward P/E ratio has fallen -21% below its 3-year average and the stock is down -21.16% in the past year. It's definitely one to have as a part of an investment portfolio.
Disclosure/Disclaimer
The information provided on this site is based on my own personal experience, research, and analysis, and it is not to be construed as professional advice. Please conduct your own research before making any investment decisions. I am not a professional financial advisor, stockbroker, or planner, nor am I a CPA or a CFP. The contents of this site and the resources provided are for informational and entertainment purposes only and do not constitute financial, accounting, or legal advice. The author is not liable for any losses or damages related to actions or failure to act related to the content on this website. I also may own stock in all of the aforementioned companies.
