People come from all around the world to see Mount Everest. But if you lived in Nepal and saw it lurking in the distance every day, it might not seem nearly as impressive. You might take it for granted or even dismiss it as no big deal. That’s really where we are today with Apple Inc. (NASDAQ:AAPL) and the absolutely gargantuan Apple cash hoard.
The tally for Apple’s cash and marketable securities has been so large for so long that no one really pays attention to it anymore. In fact, it seems the most common thing I hear said about the Apple cash stockpile these days is that “it’s really not that big.” People cite the fact that much of the quoted cash pile is really longer-term securities and remind you about Apple’s debt and potential tax implications.
Frankly, that’s ridiculous.
Apple Has a Lot of “Cash”
Even allowing for a massive tax haircut, AAPL’s cash hoard would rank as one of history largest treasures … a fortune that would make Croesus blush.
As of Apple’s latest quarterly earnings report, the company had $231.5 billion in cash and marketable securities. The Apple cash balance — the gross number, before any debt or tax considerations — would represent the 13th-largest company in the world: bigger than Wal-Mart Stores, Inc. (NYSE:WMT) and Procter & Gamble Co (NYSE:PG), and just a few billion shy of JPMorgan Chase & Co. (NYSE:JPM).
Of course, Apple’s cash is mostly overseas, while Apple’s $72.4 billion in debt is mostly domestic. But let’s pretend that AAPL suddenly got religion and decided it wanted to be debt-free now. And let’s further assume that Apple wanted to move its entire cash hoard stateside because … go America! And let’s take this one step further and assume that Apple is paying the full 35% U.S. corporate tax rate on the whole pile of money. (None of these are realistic assumptions, mind you, but let’s go through the exercise anyway.)
After taxes, Apple’s $231.5 billion in cash and securities becomes $150.5 billion. That would still put the Apple cash hoard in the top 30 largest companies in the S&P 500 … about on par with Phillip Morris International (NYSE:PM).
After stripping out the $72.4 billion in debt, the $150.5 billion becomes $78.1 billion. That’s still not exactly chump change. In fact, that’s nearly double the average (mean) market cap of all S&P 500 companies and more than four times bigger than the median market cap of all S&P 500 companies!
And remember, this all assumes the absolute worst-case scenario for taxes. Were Apple to actually attempt to repatriate its cash, it would likely negotiate much better terms. After all, if AAPL really thought it was going to get hit at 35% no matter what … wouldn’t it have gritted its teeth and brought the cash ashore by now?
So, yes. The Apple cash hoard is a big deal, no matter how you slice it.
Taking a Deeper Look at Apple’s War Chest
A skeptic will point out that only $18.2 billion of the $231.5 billion is actual “cash” in the bank. The rest is held in “marketable securities.” That’s true, but let’s dig a little deeper there. The quarterly 10-Q report gives a fair amount of detail as to what makes up the Apple cash hoard:
|Cash and Marketable Securities||Fair Market Value (millions) as of 6/25/2016|
|Money Market Funds||$3,318|
|U.S. Treasury Securities||$45,998|
|U.S. Agency Securities||$7,511|
|Non-U.S. Government Securities||$7,177|
|CDs and Time Deposits||$3,729|
|Mortgage- and Asset-Backed Securities||$18,515|
The biggest slice of Apple’s portfolio is made up of corporate bonds, which at $128.9 billion comprise about 56% of the total. The accounting sticklers are technically correct when they say these bonds are not technically “cash.” They’re not. Unlike cash and U.S. Treasury securities, corporate bonds do have credit risk. But credit risk over a diversified bond portfolio is manageable and not particularly concerning.
And that other great scourge of bond investors — interest rate risk — isn’t much of an issue because Apple intends to hold them until maturity. But let’s say that Apple needs to unload some of its bonds. As of quarter-end, AAPL was sitting on modest capital gains of about $1.3 billion on its total portfolio and about $750 million on its corporate bonds. So, even allowing for slight slippage due to transactions costs, Apple could liquidate its portfolio for cash if it needed to.
But the key takeaway here is that Apple’s marketable securities — while not technically “cash” — are close enough to cash for our purposes here. These are bonds, CDs, money market funds and other conservative savings vehicles you might find in the proverbial widows-and-orphans portfolio.
Bottom Line: Quit the Nitpicking
Yes, while the Apple cash hoard may no longer awe us like it once did … frankly, it should. Apple has managed to maintain its war chest while also embarking on one of the most aggressive dividend and share repurchase programs in history. If all goes as planned, Apple will have delivered more than $300 billion to shareholders in dividends and repurchases by 2017 since starting the program in 2012.
No matter how you slice it, that’s impressive.
Charles Lewis Sizemore, CFA is the principal of Sizemore Capital Management, a registered investment adviser in Dallas, Texas. As of this writing, he was long AAPL.