* This commentary was written prior to Apple's announcement of a $US10 billion share buyback.
Overnight, Apple is going to announce how it plans to deal with an age-old dilemma. What do you do when you’ve got too much cash?
Last night Apple called a press conference to unveil the answer to that question, which in its case revolves around the near $US100 billion of cash it has sitting within its balance sheet.
Apple chief executive Tim Cook has previously said that Apple has more cash than it needs to run the company and that there had been more discussion about strategies for dealing with the cash recently than there had been in the past.
The obvious options are (a) a major acquisition (b) a share buy-back or (c) paying dividends for the first time since 1995.
Apple has never been an acquisitive company and, given the dramatic earnings surge it is on, a buy-back might have minimal impact, which is why US analysts appear to favour the resumption of dividends.
That has been a recurring, and increasing, request from Apple shareholders. Under the late Steve Jobs, Apple ran very conservative balance sheets.
That might have been because of the brush with disaster the company experienced before his triumphant return because he had seen other once-dominant technology companies wax and then wane.
Perhaps he foresaw a need for a trove of cash to fund an increasing production line of Apple products beyond the iPhone and iPad or was reluctant to send a message to the market that Apple actually didn’t have sufficient new ideas to absorb the torrents of cash it was throwing off.
Balancing the interest of shareholders today against the perceived needs of the company itself – and of future generations of shareholders – is a tricky and often sensitive issue.
In this market, the tension between BHP Billiton’s share of the vast amounts of cash it has been generating and BHP’s $US80 billion investment pipeline has been simmering in recent years.
The $US20 billion plunge into the US shale gas sector last year – just ahead of a collapse in shale gas prices – may provide the flash point to bring the issue to a head, particularly if BHP is forced into a write-down of the value of those assets.
BHP has what it calls a ’progressive’ dividend policy under which it increases, or at least maintains, dividends (in US dollars) at a level that makes it unlikely it will ever be forced to reduce the payout. It has supplemented that, in terms of creating shareholder value, with special dividends and share buy-backs.
Since the merger with Billiton in 2001, BHP’s dividends have been increased at a compound annual rate of 26 per cent in US dollar terms (a more modest 17 per cent in Australian dollar terms) and it has generated total shareholder returns of 388 per cent, against the 89 per cent produced by the top 20 ASX stocks.
That hasn’t prevented shareholders – particularly Australian-based shareholders that have been impacted by the rise of the Australian dollar against the greenback – from complaining that they aren’t getting their fair share of the China-inspired surge in BHP’s cash flows and profitability.
They want BHP to invest less and pay out more and the shale gas investment’s poor initial performance provides them with a stronger argument, even if the sortie into the sector is predicated in longer term structural change in the US energy market rather than today’s supply-demand equations.
BHP, like most big resource companies, thinks about its portfolios within time horizons of decades. The prospective Olympic Dam expansion illustrates the issues this can create. If BHP goes ahead with the initial phase of that expansion there is little doubt that it will be value-destructive. Once completed, however, it will open up that project to decades of increasingly value-accretive expansions.
So, current shareholders experience lower returns because of the investment in order to create the potential for higher returns for future shareholders.
That’s something of a twist on the normal corporate response to shareholder pleas for higher dividends or capital management – generally the corporate response is to say that they can generate better returns by reinvesting in their businesses than would be available to the shareholders themselves if they had to reinvest a higher income stream.
The timelines for resource companies create inter-generational equity considerations as well as the more conventional issue of the returns available from reinvesting in their own operations.
BHP’s Marius Kloppers and his board will no doubt resist the calls for a re-basing of their dividends.
Kloppers is already slowing planned expenditures in response to a slowing of China’s growth rate and the eurozone crisis, which were reflected in a sharp falling off in BHP’s cash flow run rate in the first half of this financial year, where cash flows were running a third lower than the rate they were being generated at in the second half of last financial year.
He can, however, argue that the generational opportunity created by the rapid development of China and India justifies favouring re-investment over shareholder disbursements while BHP still has a vast array of major projects in its pipeline.
Apple, unless it decides to either make a 'Big Bang' acquisition or pump tens of billions into developing an entirely new product line, doesn’t have quite the same range of options for deploying its cash store organically.
While its remarkable growth rate in recent years contradicts the notion that Apple is a maturing company, a decision to re-start dividend payments would be a signal of a kind of maturity – an acknowledgment that Apple has more cash than it can profitably deploy.