I think that it may be too early to put too much effort in AppleTV hardware until distribution channel are more developed: they need content and not only hardware.

And concerning cash, it appears that Apple mostly develop its markets with new ideas and concepts which doesn’t cost that much. Apple do not need cash right now.

I remember just a few years ago when Steve Jobs tell that Apple should become a $10b / year company next year. Apple is now a $30b / year company with only 5% market share in computer and a less than 1% market share in mobile industry. There is PLENTY of room for a tremendous growth for Apple without having to spend their cash.

i mean, spend what it takes to make AppleTV and MobileMe really outstanding products, or give them up, you know?

By definition the $20m is what’s left over after they pay for operations, so they are not really using most of it at all. That money is their piggybank. They keep the capital in-house at Braeburn Capital, instead of giving it to an investment house to manage.

Most of that money just sits there for strategic purposes. They can dip into if necessary to make huge prepayment for components, buy and build their campus, and make strategic acquisitions.

They also have money on hand to battle Microsoft if necessary, and also to keep Microsoft from even trying an expensive attack against Apple to deplete Apple’s resources and either put them out of business or make them a weak competitor. The funds are also nice in that it keeps others from even thinking about acquiring Apple, because it get more expensive. This way Apple’s management can concentrate on their business, not having to worry about corporate raiders. In contrast the money is there for Apple to use to acquire others strategically.

So apart from operations and capital expenditures, Apple’s bank gives them a lot of strategic power.

I don’t worry so much about Apple management retaining earnings because they have a track record that shows that they know how to use capital efficiently and effectively.

I can’t say the same thing for Microsoft. Microsoft brings in lots of free cash from their monopoly businesses, and wastes $Billions trying in vain to establish other monopolistic platforms. Luckily for all of us, but unfortunately for MSFT shareholders, they have been unsuccessful in these attempts to extend their control of other industries.

As for Apple, let them save up their money. Some day they will use it to grow into new directions. Just wait and see.

ditto

Apple’s in a nice place right now.

With the kind of credit crunch we’re experiencing, it’s pretty good to have more cash on hand than the Wall Street bankers, who are normally the ones to issue the corporate paper to raise the funds. The commercial paper market has been greatly restricted by all the financial turmoil we’ve been experiencing most of this year.

Apple doesn’t have to worry about any of that. They can start any project they want and that is productive for shareholder value knowing that they can guarantee production and have the bank to pay for it in advance. Sure make things easier for Apple when everyone else is worrying about the credit markets.

Nice financial explanation.

I have no doubt that the buybacks and dividends are part of wider capital management issues.

Don’t get lost in the difference proximate and ultimate causality. Ultimately these strategies are part of Microsoft’s overall capital management plan because Microsoft’s management has no better use for the funds, so they’re returning them to shareholders.

I think it was appropriate for Dan to bring up the fact the Microsoft and many other companies’ management seem to favoring buybacks more than dividends.

Buffet is right in pointing out that these techniques may be favored by management at many companies, at the expense of regular shareholders. By concentrating a the value of the company in fewer shares, the stake held by management becomes a larger proportion of the total value of the company. Greater part of the company for management means less company for all other shareholders. Buffet tells us, “CEOs understand this math and know that every dime paid out in dividends reduces the value of all outstanding options,” and “Indeed, the very thought of options with strike prices that are adjusted for retained earnings seems foreign to compensation ‘experts,’ who are nevertheless encyclopedic about every management-friendly plan that exists.”

It is fair game to point out these financial strategies that are beneficial to management at the expense of ordinary shareholders. By contrast, Apple use of capital increases the value of Apple’s operations and of their capital on hand. Both of those increase value to all shareholders.

Another important issue that I meant to mention earlier, but no one has yet talked about is all those shares held by current and former employees of Microsoft.

As Microsoft was growing wildly, the share price kept going up. All these employees became millionaires just from the options.

Now that Microsoft has a stable mature business, with little hope of outsize growth, it’s share price has been stagnant for years. what does that have to do with employees. A lot of those folks that stuck around as they were amassing a small fortune, aren’t as motivated now that that their shares are growing in value. Plus there are opportunities aplenty for them to try to take their Microsoft resume and jump into startups are smaller companies where they can try to ride another wave.

So when these folks take off for their new adventures, many if not most will sell a significant portion or all of the Microsoft holdings. They either need the capital to live, as they start over, to buy into the new entity, or to break their financial ties to a company for which they no longer have any role in.

Over the years, there have been many Microsoft folks who have left for greener pastures. As all those stocks flood onto the open market, it could have the paradoxical effect of dampening the value of the Microsoft stock.

Microsoft may need a stock buy back just to soak up much of this stock that was never purchased in the first place, but was merely a part of a compensation package from a company they no longer work for.

Plus there are many investors, who rode the Microsoft wave on the way up, and don’t see much point in sticking with a stock that no longer has explosive growth, that doesn’t have many prospects for explosive growth and that is only paying 11¢ per share in quarterly dividends. Many investors are figuring correctly, “What’s in it for me?”

Thanks for the explanation. I’m the kind of stocks n00b who thinks companies should just reinvest whatever they can in expanding and diversifying their business, although it’s certainly correct that not all companies are Apple and such things aren’t so easy for them to do.

@ John E

On a similar point: with recession very much on the horizon now, and the ongoing shift to lowest common denominator production based in China, who wouldn’t want to have the breathing space Apple has with that cash in hand?

There’s a credit crunch: and Apple has lots of credit. Sounds pretty smart to me. ;)

yes, Apple does those prudent things with its cash. but still all together they only use a fraction of the $20 billion. basically Apple is sitting on the rest, however it is invested in Nevada. that is not productive, and it is not moving technology forward.

Buffet is perhaps presenting a more extreme view of share buy-backs but it is generally accepted that companies buy back shares for two reasons… Firstly, they decide that they can’t do anything with the money and the cash is weighing down the balance sheet – in other words the return on capital is low because cash is a pretty unproductive asset (earns 3% -4% interest?). Or the company is under geared, so they give the cash back to shareholders and take on debt to get a better over capital structure – this sort of thing does create value for shareholders when don right.

It doesn’t necessarily mean that they can’t do anything useful with the cash, but that is sometimes the case. more the point, a company should return cash to shareholders if it can’t find a use for it – after all it is the shareholders money.

The second reason is that the company thinks its stock is undervalued in the market place – by reducing the number of shares on issue, via repurchasing shares, the earnings per share rises and by implication so does the share price – so each remaining share is more valuable, because it represents a greater share of the total value of the company.

Now where I come from share buy backs come in two forms; mandatory and voluntary. in a mandatory buyback every shareholder gets cash whether they like it or not. Often a company will do a mandatory buy back if they are returning ‘capital’ rather than accumulated surpluses, because returning capital is tax free, whereas returning accumulated surpluses may be taxed. if the buyback is voluntary then the company will ask a broker to buy back shares more or less every day on its behalf, so if you want to participate you sell your shares on the market.

Now on the question of dividends. Dividends are a distribution of current year earnings, whereas a buyback is either a distribution of capital and/or of prior year earnings that have been retained. So the two are linked, but they are not the same thing. A company can merrily pay dividends and never have a buyback programme.

In MSFT’s case I suspect the buyback is part of a wider capital management programme – knowing Chris Liddell as I do (our kids used to play in the same soccer team at Maddills Farm in Auckland, New Zealand) the focus will be on wider capital management issues rather than giving it back because they don’t know what to do with it.

For one, Apple shows that they know what to do with capital. They are successfully growing their business organically at the envy of many competitors who just aren’t firing on all cylinders like Apple.

Second, the Apple executive team has said that they are retaining their earning for strategic purposes. Apple also regularly buys up small companies, whose technologies and personnel are useful to Apple’s businesses. Apple also reserves the opportunity to make a large game changing acquisition, if and when the right opportunity arises.

Third, Apple uses their money to finance buying binges of components for their key products. They prepay in exchange for favorable terms. They get better pricing, earlier delivery, guaranteed stock even when inventory is tight for a particular component. Apple gets better terms and amazing deals on components, much better than their competitors. That’s another god use of their capital.

Apple is growing at an accelerated pace, and have long ago overgrown their campus in Cupertino. Another large Apple project is building another campus in Cupertino to accommodate their growing staff. Acquisition of land and paying for construction is another use of their cash on hand.

So it’s quite clear that Apple is using their capital quite nicely.

Even so, Apple is still accumulating cash quickly, so years ago they set up a subsidiary, Braeburn Capital, an asset management company based in Reno, to manage their cash and investments. They even moved that subsidiary out of California to avoid additional taxes, that reduce their returns on their capital. Nevada offers a better taxing regime and is attracting investment that otherwise would have gone to California and other states with less attractive taxing regimes..