IB Net Payout Yields Model

Creative Uses Of Apple's Cash Hoard

As reported last week, Apple (AAPL) now has a cash hoard of over $97B while generating $17.5B in cash flow from operations in Q4 alone. Yes, that is correct. Apple has more cash than most countries have in GDP.

Most investors want Apple to return the cash via a dividend or major stock buyback. Neither are that appealing to me as a typical investor buys Apple for growth. A 5% dividend yield could easily be swamped by a 10-20% loss in normal markets and maybe something bigger if the iPad5 was to disappoint.

A stock buyback while seeming cheap with the stock trading at a roughly 10x forward PE, it doesn't provide a lot of value with the company trading at over 5x book value. Besides by the time it gets announced and implemented the stock might soar over $500.

What I want from management is bold thinking similar to product concepts. Use that cash to provide an investment opportunity that most investors don't have access too in these markets. Use that cash to fund deals in highly opportunistic investments ala what Warren Buffett has done via Berkshire Hathaway (BRK.A, BRK.B). Berkshire is now worth around $200B so these $2-5B deals don't move the needle any more.

Recall joking back in 2009 that Apple should throw off $5B in cash and create a bank. Now I'm thinking that such a move could've created some good returns for investors. Something that getting a dividend and reinvesting in the market would never generate.

The next time that Goldman Sachs (GS) needs a $5B bailout at attractive terms, I'd like to see Apple step up. Heck, why not buy a railroad such as Kansas City Southern (KSU) and spin it off to shareholders similar to what Buffett did. For less cash than what Apple will generate in Q1, investors could own that railroad.

Plenty of opportunities exist where it takes an investment of scale at a minutes notice to get the deal. Something that Apple and very few others around the world could even invest. Below are a few examples of potential opportunities:

  • With natural gas prices hitting 10 year lows, use $5-10B to invest in a major lease holder that falls into financing problems such as possibly Chesapeake Energy (CHK).
  • Sears Holdings (SHLD) continues to face fears of bankruptcy where the potential might exist to buy a ton of real estate from them on the cheap.
  • Another trade on Sears Holdings would be to actually buy the stock if due diligence found plenty of cash existed to avoid bankruptcy. Heck, a sizeable investment in the open market would scramble shorts where a limited float exists.

European sovereign debt was ripe for the picking when the Corzine trade at MF Global caused them to go bankrupt last year. George Soros stepped in to buy some of the bonds, but what if Apple had a few billion dollars lined up instead of Soros.

These of course are just examples of the investment opportunities that might present themselves. Most serious investors will just dismiss this idea as crazy, but I'd rather see something bold that creates value than just group think. Possibly just spin off the cash into an investment vehicle similar to a Blackstone Group (BX) where Apple shareholders would get shares with each cash transfer. Or maybe get more creative and give investors the option of a dividend or stock in the new investment vehicle. Even if the money was completely lost it wouldn't be a big deal as investors aren't getting any benefit from the cash now.

What investors could get though are some incredible investments. At this point, Apple can spin off every dollar of cash flow earned giving such a vehicle a stream of cash to make investments. Almost like a sovereign investment fund getting constant cash from oil earnings. Why not go bold?

Disclosure: Long AAPL and GS. Please review the disclaimer page for more details. 


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