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Tuesday, 02 September 2014

iVault

Apple's cash is key to unlocking suppressed value

Apple on Friday once again overtook Exxon Mobil as the world’s most valuable publicly traded company. But investors seem to think its roughly $420 billion market capitalization is some kind of limit. The company doesn’t get full credit for its nearly $100 billion cash hoard or its growth. Apple’s cash could be the key to unlocking suppressed value.

Despite its already huge size, revenue is growing at a 70 percent annual gallop, and earnings faster still. The company added another $16 billion to its pile of cash and securities in the recently ended quarter. Its stash is big enough to buy Facebook in its entirety at the mooted valuation, or to reduce the projected U.S. budget deficit for fiscal 2012 by about 10 percent.

That’s all fun to contemplate, but investors might grasp the company now led by Tim Cook better if it simply rewarded its shareholders. Despite Apple’s supercharged growth, its stock trades at less than 11 times estimated 2012 earnings, while the average S&P 500 company is valued at 12.5 times. Apply the bigger multiple that a smaller, slower-growing Apple traded on back in 2006 to forecast earnings for this year, and the company’s worth would easily top $1 trillion.

Given today’s arbitrarily low valuation, paying out a big slug of cash to shareholders probably wouldn’t ultimately hit Apple’s market capitalization much, if at all. Giving $50 billion, say, would leave enough on hand for any conceivable investments or acquisitions. If that called for the company to pay some U.S. tax to bring funds home from overseas, so be it.

Meanwhile, the iPhones and iPads flying off the shelves around the world should generate around $50 billion of free cash flow in the fiscal year to September. Supposing Cook decided to pay half of that out to shareholders, Apple would suddenly offer a 6 percent dividend yield. By comparison, the S&P 500 yields an average 2 percent. If investors paid the same 50 times multiple for Apple’s dividend, that too would take its value well into 13 figures.

That’s probably over-egging it for a technology stock. Earnings can be volatile, growth is bound to slow, and Apple could face more awkward questions about conditions at its suppliers’ factories in China and elsewhere. Even so, throwing some cash around could give investors new reasons to recognize why the most valuable company is actually cheap.

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