An embarrassment of riches: what does Apple plan to do with its cash mountain?

I know that students are being to understand concepts like cash flow forecasting and balance sheets when they begin to appreciate that a firm can have too much cash. In the scale of business difficulties, it’s perhaps quite a minor problem – even a nice one to face! It’s a question that Apple have being thinking through, and have made an announcement about this week.

The company has finally decided to part with some of the $100 billion or so of cash that it’s holding. The main plan is to start paying a quarterly dividend — its first since 1995, according to The Economist — and to buy back billions of dollars of its shares. Investors in the company will now be watching closely to see what it does with the rest of its loot.

This marks a big shift for the company. Under the reign of Steve Jobs, Apple’s late chief executive and co-founder, the notion that Apple might pay a dividend was considered out of the question. The company’s near-bankruptcy in the mid-1990s had left Jobs with the profound conviction that Apple should build up a huge cash cushion to shield itself from the uncertainties of the marketplace it operates in. But the new boss is more relaxed and has convinced Apple’s board that it can afford to part with some of its billions. It will still have masses left: Apple could still add over $35 billion to the cash pile it held at the end of 2011. The big question now is what else might it do with the money it intends to hang on to. Some observers have speculated that Apple could choose to accelerate investments in its formidable global supply chain. It could also look for acquisitions in areas such as mobile payments, which would be complementary to its existing businesses.

The Guardian picks up the story, pointing out that the planned dividend isn’t as enormous as it appears. The £6.3bn that the world’s biggest company intends to distribute every year sounds impressive but, at the current share price of about $600, the dividend yield is just 1.77%, pretty miserable. And Vodafone will pay slightly more (£6.7bn) this year.

The Guardian report goes on: the extraordinary thing is how Apple got away for so long without paying a dividend. Or, at least, it’s amazing to UK eyes. In the UK, clinging on to shareholders’ cash unnecessarily is almost regarded as an act of treason. If companies have an embarrassment of riches, their duty is clear – hand over the money so the owners can decide where they wish to invest their winnings. But, they argue, US companies, and US technology firms in particular, are different. Rainy-day cash hoards are tolerated because companies are given two freedoms – first, to invest in research regardless of the ups and downs of the product life cycle; and, second, to have the firepower to pursue big acquisitions.

Apple is in the happy situation that it has so much cash that the company has more than sufficient resources to spend lavishly on research and fund takeovers and return to paying dividends!

Apple isn’t the only firm hoarding cash – it’s a big issue in the UK, where the chancellor would love to succeed in encouraging firms to invest, rather than hoard cash. The Economist has recently drawn attention to this issue with a recent article on UK firms ‘stashing the cash’.