New York - Apple once again rewarded shareholders richly as
its shares surged to new highs above $500 on Monday. There is, though, one part
of the iPhone and iPad company's business that is not exactly humming: its
management of a pile of money now probably exceeding $100bn.
While Main Street US investors are bombarded with offers
from banks - such as Capital One Financial - offering bank account yields of as
much as 1%, Apple may be settling for about that or less for its stash, which
is bigger than the gross domestic product of many smaller nations.
And comparisons with fellow hoarders in the tech world, such
as Microsoft and Google, indicate that in this area at least the most valuable
publicly traded American company is probably underperforming.
With the mountain growing at an extraordinary rate - Apple's
pile of money rose by more than $16bn to $97.6bn in the final quarter of last
year - the weak returns may strengthen the arguments of investors who think it
might be time Apple started returning some money to shareholders through a
dividend.
Otherwise, given the phenomenal success of its iPhone in
particular, Apple could at current rates of cash generation go through the
$200bn level sometime in 2013.
Apple said in its annual results filing that its cash and
investments - worth $81.6bn at that stage - earned just 0.77% in the fiscal
year ended September 24 2011. That was a hair above the 0.75% return earned the
previous year, and down from 1.43% in fiscal 2009 and 3.44% in 2008.
"Clearly it's low - absolutely and relatively,"
said Robert Willens, president of New York consulting firm Robert Willens and a
veteran accounting analyst on Wall Street.
When asked about its cash management, an Apple spokesperson
refers to the company's latest regulatory filing, which says its investment
policy and strategy are focused on preservation of capital and supporting the
liquidity requirements of the company. It also said it invests primarily in
"investment grade" securities.
"They are not running themselves like a hedge fund.
They are running it like a liquidity portfolio to meet their business
needs," said Alex Roever, head of short-term fixed income strategy at JP
Morgan Securities in New York.
And yet some of its peers appear to be able to eke out higher
returns without seeming to take greater risks.
Microsoft, which had $59.29bn of cash, liquid securities and
other investments at the end of 2011, and Google with $44.63bn in its pile, do
not provide comparisons for a weighted average interest rate earned.
However, a look at their returns using a number of different
measurements suggests that they are working their money harder with riskier
investments than Apple and generating higher investment returns, an analysis by
Reuters showed.
In 2011, for example, Google recorded a gross realised gain
of $381m and net unrealised gain of $469m for a total $850m on its liquid
marketable securities - which were up to $34.6bn by the end of the year.
Google declined to comment on its rate of return, though it reported
gross unrealised gains and losses on cash equivalents were not material at the
end of the past two years. Overall, though, the figures suggest returns may
have been almost 2%.
Meanwhile, Microsoft in its fiscal year ended June 30
recorded net unrealised gains of $2.83bn on its cash and other investments,
which totalled 63.64bn at the end of that period. Most of that gain came from
gains on common and preferred stock holdings.
It also recorded dividends and interest income of $900m. Its
filings show that Microsoft, which also declined comment on its rate of return
and investment policies, dabbles in the trading of oil, metal and grain futures
and options.
Apple, by contrast, recorded net realised gains of just
$106m in its year to September 24 from sales of securities, and net unrealised
gains of just $80m - and this was from an accumulation of $81.6bn by that date.
If you total the 2011 quarterly interest incomes of the
companies and then divide by the average size of their portfolios - albeit an
imperfect comparative measurement - then you come up with similar indications
of performance.
Using that very rough comparison of Apple's annual
investment return with those of Microsoft and Google, Apple posted a total
return of just 0.53% in calendar year 2011, Microsoft earned 1.52% and Google
1.47%.
Apple history key
Some investors and strategists say it would be unfair to
suggest that Apple and its chief financial officer Peter Oppenheimer have not
tried hard enough to put Apple's money to work. They argue that protecting the
cash is the priority and that chasing yield isn't his job.
"Their core competency is not investing cash. It's
making iPhones," said Anthony Carfang, partner at consulting firm Treasury
Strategies in Chicago. "I would be concerned if these guys thought they
were hotshot investment managers looking to beat the market."
Apple's financial problems in the 1990s means it tends to
have a more conservative philosophy towards money management than the others
who since listing have never struggled for cash, analysts said. Unlike
Microsoft and Google, Apple does not own any stocks as investments, for
example.
But a look at the three companies' disclosure of the
investment categories in which they place their cash suggests that Apple now
isn't being that much more conservative than Microsoft and Google - in some
ways, it may be taking on more risk.
For example, by the end of 2011 Apple had about 40% of its
hoard in corporate securities, up from 36% a year earlier, while at Google it
was more like 14% and at Microsoft around 17%.
Indeed, Apple may have suffered lower returns because it
didn't have as much as the others in the US Treasury market, which had a
barnstorming year in 2011. Its Treasury and agency holdings by the end of 2011
were about 36%, against more than 50% at Microsoft and Google.
In the past year, Apple also increased its holdings of
longer-dated bonds, which would pay off if long-term interest rates fall but
could sour if they rise. It reduced its stakes in safer but lower-yielding
short-term bonds in favour of higher-yielding longer-dated debt, resulting in
higher duration risk. It held $67.4bn in long-term debt at the end of December,
double its level a year earlier.
There is, though, at least some hope that Apple's returns
may be catching up Google.
In the quarter ended December 31 Apple reported dividends
and interest income of $137m, a period in which Microsoft earned $182m. Google
said it lost $18m from interest and other income in that period, though this
included an impairment charge of $88m for its investment in troubled wireless
company Clearwire.