Apple Capital: Half the size of Goldman Sachs

From Apple should shrink its finance arm before it goes bananas in the current issue of the Economist:

Apple does not organize its financial activities into one subsidiary, but Schumpeter* has lumped them together. The result—call it “Apple Capital”—has $262 billion of assets, $108 billion of debt, and has traded $1.6 trillion of securities since 2011. It appears to be run fairly cautiously and is part of a thriving firm, but it still deserves scrutiny. Companies have a history of being hurt by their financial arms; think General Electric (GE) or General Motors (GM).

Apple Capital has lots of responsibilities but three stand out. It invests the firm’s mountain of surplus profits, mainly in “highly rated” instruments (this task seems to fall to Braeburn Capital, a subsidiary in Nevada, which uses some external fund managers). Apple Capital also uses derivatives in order to protect the firm against currency and interest-rate gyrations. And it manages America’s fifth-biggest corporate-debt pile by issuing Apple bonds as part of an elaborate strategy to limit tax bills.

Apple Capital has become important to its parent. Since Jobs died, its assets have risen by 221%, twice as fast as the company’s sales, reflecting Apple’s huge build-up of profits. Its investments are worth 32% of Apple’s market value, and its profits (investment income, plus gains on derivatives, less interest costs) have been 7% of Apple’s pre-tax profits so far this year. It is also sizeable compared with other financial firms. Consider four measures: assets, debt, credit exposure and profits. Depending on the yardstick, Apple Capital is 30-85% as big as Goldman Sachs. It is 22-42% as large as GE Capital was at its peak in 2007, just before things went down the tubes during the subprime crisis.

My take: The “bananas” headline is a bit hysterical, given the reporting, but Apple Capital does seem to be making riskier investments. For example, since 2011 Apple’s derivatives book—the face value of its contracts—has risen by 425%, to $124 billion. According to the Economist, this is the third-largest book of any non-financial firm in America, after GE and Ford.

*An unsigned column named for Joseph Schumpeter, Austrian-born economist best known for popularizing the term “creative destruction.”

3 Comments

  1. Fred Stein said:

    Whenever I read “Apple should…” the hackles rise. Almost always the author projects their expertise or their ideology or some recycled idea, onto Apple. The referenced article is no exception.

    The comparisons to GE and GM illustrate how superficial the thinking is. GE and GM created finance arms to prop up sales of their products. Apple has a big cash hoard because they’re capital efficient and have insanely low SG&A and R&D, and because of our current tax laws. (Above Avalon provides a deep dive into Apple’s cash generating system. It’s worth a listen.).

    Does the author of the article think he knows more than Apple’s management? I’m sure Apple is looking at the best ways to use their cash. They recently found one, InVisage. But Apple generate cash faster than they can find great opportunities, except of course buying back AAPL.

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    November 14, 2017
  2. Ken Cheng said:

    Reminds me alot of the Rotten at the Core article at Seeking Alpha from 2 weeks ago. Similar comments about financial engineering and how Steve would disapprove, and similar hype about the risk of corporate bonds and how that could damage Apple if rates were to rise.

    All quite silly.

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    November 14, 2017
  3. Gregg Thurman said:

    All the metrics (on Apple’s side) are huge, until you realize that those metrics are made possible by the world’s most valuable technology/consumer electronics company.

    I would EXPECT a company with Apple’s long term cash generation strength to have a large capital management division.

    Fred, you are correct when you say, “Almost always the author projects their expertise or their ideology or some recycled idea, onto Apple”. You could have added, “But those expertises/ideologies have little to no bearing on Apple’s financial health”.

    2
    November 14, 2017

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