- Apple has announced plans to get to a $0 net cash balance, likely via even larger scale dividend and stock repurchase programs than it has in place now.
- On its face, the move seems contrary to the financial conservatism founder Steve Jobs helped instill in it; under Jobs, Apple eliminated its debt and stockpiled cash.
- But Fred Anderson, who served as Apple’s chief financial officer under Jobs and worked closely with him to return it to health after it nearly failed, thinks he would have eventually understood and supported the move to return cash to shareholders.
Investors may love Apple’s plan to reduce its massive cash balance to $0, but what would Steve Jobs think?
Given how Jobs ran the company after he returned to it in the late 1990s, one might suppose that he would hate the plan. But one of his former close collaborators at Apple thinks Jobs would have eventually embraced it, or at least something like it, albeit likely belated and possibly begrudgingly. The fact that the company is overflowing with cash would have forced him to.
“I do think ultimately he would have come around to it,” said Fred Anderson, who served as Apple’s chief financial officer from 1996 to 2004, during most of which time Jobs was its CEO. “With the massive operating cash flows, I think he would have returned cash to shareholders.”
On its face, Apple’s plan to get down to $0 in net cash would seem contrary to the financial ethos Jobs helped instill in the company.
When Jobs returned to Apple in the late 1990s, the computer maker was weeks away from running out of money, an experience that shaped Jobs’ outlook for the rest of his term there. Over the next 14 years, under his leadership, the company paid off its debts and stockpiled cash.
Under Jobs, Apple cut unprofitable products from its lineup, emphasizing a handful of big money makers. It gained tight control over its inventory and logistical operations to the point where it needed little working capital. And it avoided major acquisitions. Collectively, the steps helped turn the company into a cash machine.
Jobs famously eschewed the idea of giving out some of Apple’s mounting stockpile to shareholders. Even long after Apple had returned to firm financial ground and was generating cash by the boatload, he refused to reinstate a dividend, which the company had discontinued during its days of financial duress. And while Apple’s board put in place a $500 million stock repurchase plan in 1999, the company under Jobs never bought back all the stock it was authorized to buy under the program.
Because of Apple’s near-death experience, “Steve retained his conservative outlook and wanting to have a strong cash position,” Anderson said.
Apple’s a much different company than when Jobs returned to it
But the Apple of today is a fundamentally different company than when Jobs resumed control and nursed it back to health, Anderson said. The company isn’t in any danger of dying. It’s generating more than enough cash each quarter to fund the development of new products and to tide it through a possible downturn.
In fact, when it comes to cash, the biggest problem Apple now faces isn’t how to ensure it has enough set aside, but how to go about purging its surplus.
Under Jobs’ successor, Tim Cook, Apple has been much less tight-fisted about its finances. In 2014, Apple made its first billion-dollar acquisition when it bought Beats. Over the last five years, it has more than tripled its research-and-development spending. It has nearly tripled its capital expenditures over the last six years.
What’s more, unlike Jobs, Cook embraced the idea of giving some of Apple’s cash to shareholders. Soon after he replaced Jobs, he restarted Apple’s dividend program and then launched a succession of gigantic stock repurchase programs. Last year, for example, Apple spent a whopping $32.9 billion buying back stock and handed out another $12.8 billion in dividends.
To help fund those programs without having to repatriate and pay taxes on its overseas stockpile, Apple under Cook also took on massive amounts of debt. At the end of its most recent quarter, Apple had $101 billion in long-term debt, up from $0 when Jobs left the company.
Apple has become a ‘cash-flow machine’
Even so, even with all this profligacy, Apple still has more cash than it seems to know what to do with. In its last fiscal year, for example, the company’s net cash balance — the difference between its cash and marketable securities on the one hand and its debt on the other — actually increased by $6.5 billion, even in spite of all the money it invested or returned to shareholders.
“Apple has all the money it needs for organic growth,” Anderson said. “They’re like a cash-flow machine.”
Given the magnitude of the build-up in cash, he would have come around.
And if a company has too much cash that its not profitably reinvesting, it can actually be a drag on its shares, because the stockpile depresses the company’s return on equity.
Jobs eventually would have recognized the situation the company was in, Anderson said. To be sure, it would probably have taken a lot of education, and he likely wouldn’t have come around as fast or as far as Cook did.
“I think he probably wouldn’t have gone so far as zero net cash,” Anderson said.
But Jobs would have seen the necessity of finding a way to dispense Apple’s cash rather than hoarding it, Anderson said.
“Given the magnitude of the build-up in cash, he would have come around,” he said.
And for his part, Anderson, now a managing director at venture-capital firm NextEquity Partners, thinks Apple’s plan to disperse cash to shareholders is a good one.
“My bottom line is it makes total sense to me,” he said.
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