Apple logo in Beijing. (AP Photo/Ng Han Guan)
During Apple’s earnings conference call on February 1, 2018, Luca Maestri, the company’s CFO, stated that due to changes in the tax laws, “Tax reform will allow us to pursue a more optimal capital structure for our company. Our current net cash position is $163 billion. And given the increased financial and operational flexibility from the access to our foreign cash, we are targeting to become approximately net cash neutral over time.”
In just under three years Apple’s net cash position has essentially been halved while it has bought back 9.4 billion split-adjusted shares or 35% of them. Using the estimates below it should take Apple another three years and $250 billion to get to a neutral cash position.
Calculation to neutral cash position
Using the estimates below it will take Apple three years and about $250 billion to get to a neutral cash position. The $250 billion is 12% of the company’s market cap and would increase EPS by approximately 4% per year.
Apple capital return history
Buybacks started in late 2012
Apple started to buy back shares in its December 2012 quarter but began in earnest in the June 2013 quarter. Since than it has spent just over $400 billion to repurchase stock. Adjusting for stock splits Apple has decreased its share count from 26.5 billion to 17.1 billion, a decrease of 35%.
Note: fiscal 2013 to 2017 are based on cash flow statements
Cash is still king
Being cash neutral does not mean having any cash, as every company requires some level to run its business and take advantage of opportunities as they arise. In a situation where excess cash generates a low level of return and the company is fully funding its operations and research and development, it makes sense to use some to buy back shares.
Debt can be good as long as it is not excessive
Apple started to take on debt as it began to buy back shares. Given its ability to borrow at low rates it makes sense to leverage its balance sheet, shrink the number of shares, which increases its EPS, and therefore share price.
Net cash (Cash minus debt)
The high-water mark for Apple’s net cash position was $162.7 billion in its December 2017 quarter. It was on the earnings call for this quarter that the company announced its goal to become cash neutral.
Free cash flow (Operating cash flow minus capital expenditures)
Apple generated its greatest amount of free cash flow in fiscal 2015 when it launched its larger screen iPhone 6 and 6+ in September 2014. Fiscal 2020 came in a very close second and it would not be surprising to see fiscal 2021 break the record with the iPhone 12. Note that fiscal 2015 had $233.7 billion in revenue and last year the company generated $274.5 billion.
Amount spent on dividends
While Apple has been increasing its dividend, it has been buying back stock. This has helped to keep the absolute amount in dollars it spends on dividends in check. While the amount has risen over the years, it was flat between fiscal 2019 and 2020 and may only rise slightly this fiscal year.
Apple hardly spends any money on acquisitions
Except for $3 billion for Beats in 2014 and $1.5 billion in fiscal 2020, Apple spent less than $721 million in the other seven years. For a company of Apple’s size what it spends on acquisitions doesn’t impact cash flow or its objective of becoming cash flow neutral.
Apple price chart
I provide independent research of technology companies and was previously one of two analysts that determined the technology holdings for Atlantic Trust (Invesco’s high