Apple 2.0

Covering the business that Steve Jobs built

Don't be fooled by calls for Apple to declare a dividend

July 21, 2011: 2:22 PM ET

Apple's $76 billion cash stockpile is burning a hole in Wall Street's pockets

Source: Asymco.com

It happens every quarter. Apple (AAPL) reports blowout sales and earnings. Its holdings in cash and marketable securities swell by billions of dollars -- by $10.7 billion, to be specific, in the past 90 days. And analysts come out of the woodwork to demand that the company spend some of those billions buying back shares or issuing dividends or, preferably, both.

Last year, when Apple's cash holdings reached $46 billion, Sanford Bernstein and Sons' Toni Sacconaghi wrote an open letter to Apple's board of directors reporting that investor frustration over all that wasted cash was "bordering on exasperation."  (See here.) Now that those $46 billion have grown to more than $76 billion  -- greater than the GDP of 126 nations, as Newser's Mark Russell helpfully points out -- Sacconaghi is set to burst.

"We're talking about a level of cash that's preposterous by any metric," he  told the Wall Street Journal.

"It's going to become truly untenable," the New York Times quoted Oppenheimer's Yair Reiner in April. "At some point something will need to get done."

What these men want done is for Apple to give the money to "the stockholders." What they don't say is that they are the stockholders. Institutions own more than 70% of Apple's shares and would be the primary beneficiaries of any buyback or dividend.

Nobody should be fooled by these demands. Matt Richman, a 16-year-old who just finished his sophomore year in high school, isn't. In an impressively level-head blog post he points out that Microsoft (MSFT) has spent $170 billion in stock buybacks and dividends over the past 10 years only to see its stock drop nearly 20%. Apple may not create instant shareholder value the way Toni Sacconaghi would like, but Steve Jobs' way is working just fine for Matt Richman. "I'm more than happy," he writes, "with the performance of my 8 shares."

For readers interested in what Apple should and shouldn't be doing with its cash, I recommend what may be the definitive word on the subject: The 57-minute seminar that Asymco's Horace Dediu delivered in his third Critical Path podcast, "It's Good to Be King," on Dan Benjamin's 5by5 Network. His conclusion: Apple's problem is not too much cash. It's building iPhones and iPads fast enough to meet demand.

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About This Author
Philip Elmer-Dewitt
Philip Elmer-DeWitt
Editor, Apple 2.0, Fortune

Philip Elmer-DeWitt has been following Apple since 1982, first for Time Magazine, and now on the Web for Fortune.com.

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