Strategic choice: What should Apple do for its investors?

This graphic says it all. Just look at the astonishing growth in quarterly profits achieved by Apple in recent years, culminating in a staggering result for the final quarter of 2011 which surpassed even the most optimistic forecasts of investment analysts. A key point for students to consider from this growth in profits is that Apple has followed a policy of retaining profits rather than returning them to shareholders as dividends (or share buy backs).

In Apple’s case, profits have turned into huge cash balances - now almost $100billion. To put this into perspective, in the last three months of 2011, Apple’s cash balances were increasing by $1 billion per week!

So, what should Apple do with the cash?

This Guardian article examines the background to the growth in Apple’s cash balances and outlines the debate about Apple’s strategic options in the aftermath of the death of Steve Jobs. Will a new CEO and a reconfigured Board of Directors change Apple’s approach to shareholders?

Amongst the options outlined are:

Diversification in to Television?

Might Apple be about to make a major investment in smart televisions (imagine the transformational effects if Apple could do for television what is has done for music publishing and tablet computing). the article states that “factory reports suggest a fully-fledged smart TV is planned for later this year [2012]”. This would almost certainly be part of a sustained organic growth strategy.

Invest in one or more major acquisitions (external growth)

Possible. After all there is precedent with Microsoft buying Skype etc. But what would Apple want to buy? A technology platform? A social network? A manufacturer (vertical integration)? It might invest in content and media rights - similar to the approach taken by Amazon. Could Apple start acquiring content publishers, film studios etc?

Other Apple observers believe that the firm is unlikely to make a big acquisition. It has tended instead to buy up (or take a stake in) small companies that provide it with important technology – such as Siri, which supplies the voice-powered personal assistant on the iPhone 4S.

Expansion of the Apple retail portfolio (extend and control distribution)

particularly in emerging markets (though I suspect such as strategy is already in play and has a relatively short payback. hardly likely to be a big drain on Apple’s existing cash resources)

Start paying dividends

A simple move would be to start a programme of dividends to shareholders. However, Apple has never paid a dividend. It has argued that shareholders benefit more from it investing in product innovation and growth. The cash balances also provide a defensive buffer against competitive threats - which Apple still faces despite its amazing success.

A share buy-back programme

With this, Apple buys its own shares from the stock market and then cancels those shares; resulting in fewer shares in distribution sharing the firm’s profits. In theory, that increases the share price for remaining shares.