Let me say upfront that I’m not a financial analyst so this post is intentionally light on financial analysis, focusing instead on the strategic perspective.
Apple’s decision to use approximately half of its vast $97 billion cash surplus in a mix of dividends and stock repurchase says as much about the company from a strategic perspective as it does financially.
In these days of low interest rates on savings, having large reserves of cash isn’t the strategic plus it once was, which is why financial analysts and investors haven’t exactly been getting wildly excited about that $97 billion being left to sit in the bank. By deciding to pay a dividend to shareholders and to repurchase stock, but to leave half the money untouched, Apple is able to have its cake and eat it. It has sent a positive message to the market, allowing investors to share further in the company’s current prosperity but at the same time it will retain approximately $50 billion, a vast chunk of working capital. To date Apple has been using its cash reserves to fund areas such as product development, strategic investments and retail stores. Apple has had the benefit of being able to invest in its own business in an organic manner with the agility necessary to anticipate and meet market changes and consumer demand. It is no coincidence that during the same period Apple has been able to develop an unprecedentedly successful portfolio of products.
Apple’s Message: Innovate to Win, Not Acquire to Win
A common strategy for successful companies is to buy their competition out of the marketplace, particularly when that company has large cash reserves or easy access to capital. But such a move isn’t for Apple. In so many of their product categories Apple is the leader, in terms of either market share or innovation leadership, often both. Apple could have, for example, bought a handset competitor, just like Google did (though for different strategic reasons) when it acquired Motorola for $12.5 billion last year. But instead of going down that path, Apple is holding true to its current course and its core values of building better products. A point underlined by CEO Tim Cook’s quote from yesterday:
“Innovation is the most important objective at Apple and we will not lose sight of that.”
Apple Is Still Surfing the Success Wave
By meeting the markets half way with a dividends pay out Apple helps put one set of persistent questions to bed, allowing it to focus market attention more squarely on the product story. And by committing $10 billion to stock buyback Apple is also showing the market just how much it believes in itself. Apple continues to ride the crest of a very, very big wave. It has been on top of its game for close to a decade now, establishing leadership in its three core device categories with the iPod, iPhone and iPad. Without compromising its pricing and positioning principles, Apple has stayed ahead of the competition despite being under simultaneous attack from multiple quarters. Things should get even better this year:
- Android tablet competitors remain niche while iPad goes from strength to strength
- iPhone continues to increase momentum, with Apple now the third biggest mobile phone company globally, and the iPhone 5 will almost certainly supercharge sales further
- Apple looks set to finally play its TV cards fully. If Apple gets its TV play right it will not only extend its footprint in the home, it will reach new households, potentially on a scale which would make current iPad sales look like small change.
Planning for the Trough
10 years ago Sony had the same momentum, prestige and allure of Apple, now it is firmly in Apple’s shadow. 5 years ago Nokia was at the top of its game, the clear global leader in smartphones, now it too toils in Apple’s slipstream. Apple has that priceless commodity of momentum, momentum that has swept giants such as these aside. But every single company in history goes through cycles, as indeed Apple has already done so itself. And Apple’s management is smart enough to know that every peak of a wave has its trough. When that time eventually comes (and it may be long way off yet) a $50+ billion cash reserve will come in supremely handy for rebuilding success, once again.