Apple is relying on robust free cash flow and debt issuance to support its aggressive $130 billion capital management program. Even though Apple has $155 billion of cash, cash equivalents, and marketable securities at quarter end, the company's overall financial flexibility is limited somewhat by having approximately 90% of total cash held by foreign subsidiaries, while component purchase commitments and other obligations total $26 billion. With approximately $50 billion of expected free cash flow, I suspect Apple will issue more debt and commercial paper to increase its capital management program in 2015, while maintaining enough flexibility to invest in organic growth opportunities, including M&A. I don't view going private as a realistic option for Apple at this time given low feasibility and practicality.
Excluding the $29 billion of debt and $6 billion of commercial paper from Apple's gross cash, Apple's net cash, cash equivalents, and marketable securities stood at $120 billion at quarter end. Exhibit 1 highlights how Apple's net cash has remained relatively unchanged since the capital management program was initiated in 2012, a testament of the company's robust free cash flow.
Exhibit 1: Apple's Net Cash, Cash Equivalents, and Marketable Securities Position
Apple's domestic cash continues to decline, and now stands at $18 billion, due to the ongoing capital management program. With international sales accounting for 60% of total sales, Apple's foreign cash levels have ballooned to $137 billion, as depicted in Exhibit 2.
Exhibit 2: Apple Cash - U.S. Versus Foreign
At the same time, Apple's contractual obligations have been steadily increasing and now stand at $24 billion. Purchase commitments and other obligations include components, product tooling and manufacturing process equipment, and commitments related to advertising, R&D, Internet and telecommunications services and other obligations.
Apple launched a $10 billion share buyback program in 2012, with subsequent annual revisions to $60 billion in 2013, and $90 billion in 2014. Apple currently has $22 billion of share buyback authorization remaining. Exhibit 3 highlights Apple's share repurchase and dividend activity since 2012.
Exhibit 3: Apple Capital Management Activity
Forward Analysis: Apple's 2015 Capital Management Program
I expect the board to revise Apple's capital management program in 2015 to match the company's free cash flow, which would support an additional $40 billion of capital repatriation. I expect the share repurchase authorization to be increased by $30 billion to $120 billion, while the quarterly cash dividend is increased to $0.50/share, from $0.47/share. In order to fund the share repurchases and dividend using U.S. cash, I expect Apple to raise additional debt. In terms of total cash, Apple may reach $170 billion of gross cash, cash equivalents, and marketable securities by year-end 2015, of which approximately $50 billion would be from debt and commercial paper issuances.
In terms of Apple going private, the amount of debt that would need to be raised to make a leveraged buyout or leveraged recapitalization possible would likely be insurmountable at this time, even after considering Apple's $170 billion of expected cash by year-end 2015. In addition, with no significant Apple insider share ownership, it is unclear where the motive for going private would originate from as management has shown no prior desire for such a move, and shareholders would need to weigh the pros and cons of going private versus alternatives, including splitting the company up or spinning segments off. From a purely business standpoint, while there are benefits from going private, such as being able to manage the business easier with a long-term viewpoint, there is little evidence to suggest Apple has not been able to do that as a public company. Being public also helps in terms of accessing capital markets and paying employee compensation using stock. Similar to Dell, if Apple found itself in a situation where underperforming business segments were masking better-performing pieces, going private may make more sense, although the sheer volume of funds required would be daunting.
This report should be used to understand my views on Apple's capital management program, especially when I discuss the topic in my daily email, AAPL Orchard, or in other Above Avalon reports. Over the coming months, if new data becomes available, I will update my estimates accordingly. This report is not meant to be used as investment advice. This report was produced by Neil Cybart on December 9, 2014.