From Andrew Bary's "Cash-Rich Berkshire Hathaway, Apple and Alphabet Should Gain From Higher Rates" posted Friday:
With its enormous cash reserves now earning next to nothing, Berkshire Hathaway could be one of the bigger corporate beneficiaries of the Federal Reserve’s expected moves to raise short-term interest rates to about 2% by year-end.
The company’s earnings in 2023 could rise about 8% simply from the higher yields on its cash, Barron’s estimates.
Other big companies that should gain are cash-rich Apple (ticker: AAPL) and Alphabet (GOOGL). Apple had $203 billion of cash and equivalents at year-end 2021, and Alphabet was sitting on $139 billion.
Apple could be earning $4 billion more on its cash by 2023 and Alphabet nearly $3 billion. Higher interest income could boost Apple’s net income by about 3% next year, and Alphabet’s earnings may get a 4% lift.
My take: Silver lining.
And don’t forget that much of that cheap borrowed money has been invested in buying back cheap AAPL.
“How much longer do you expect large buybacks to continue?”
My expectation? Simple: Large buybacks will continue until net cash ~ equals net debt. Depending on the predicted steadiness of valuation, Apple will increase or decrease buybacks to keep that net cash/net debt ratio generally in balance. Dividends should steadily increase from that point on but in keeping with Apple’s perception of valuation steadiness. As valuation steadies, dividends as a percentage of returned net cash should increase.
Caveats to the above: A massive purchase of an outside company/technology, or a massive influx of cash from hitting yet another ball out of the park.
Yes, the law of diminishing returns kicks in as the valuation goes up. That’s why the big drop in price was good news for AAPL longs.
But other than it definitely happening when the cash/debt balance is met, I wouldn’t even begin to second-guess Apple on when they’ll shift towards a higher percentage of net profit going to dividend growth. The reason for that is pretty simple: They know what they’re planning, and I don’t.
For example: If Apple’s realistically looking at becoming a $5T market cap company in 2 years – IN SPITE OF continued massive buybacks – then I’d say buybacks look awfully tasty, even at these prices.
“…I expect the tap to be slowed on the pace of repurchases no later than next April.”
That will very much depend on what happens to AAPL’s valuation. If it’s kept low, that cash will continue to flow into buybacks. And AAPL’s valuation is a function of macro issues right now.
I’m not seeing any evidence or have heard any words from management that suggest the level of buybacks will vary based on the company’s valuation. The company has pretty much exhausted all retained earnings since the company went public in 1980 and in FY2021 disbursed more through capital returns to shareholders than the company achieved in net income and as a consequence reduced the net cash position. At the end of FY2021, the net cash position was $66 billion. Since the reinstatement of the dividend and the start of the share repurchase program, Apple has returned $631 billion to shareholders. I expect the amounts authorized annually for repurchases to begin to slow no later than April 2023 when the company announces its annual capital return program update for the subsequent 12 months.
“I’m not seeing any evidence…buybacks will vary…”
I’m not seeing evidence of change, period.
If that’s the case, you haven’t been following Apple’s balance sheet. Including paid-in capital, there’s only $63 billion of shareholders’ equity remaining on the balance sheet at the end of FY2021 after returning $631 billion of capital over the past 10 years and through FQ1 2022. Once that’s exhausted, there’s no more equity to “return” to shareholders other than the limit of each year’s net income for both dividend and share repurchases. Apple has been working down its retained earnings balances to a low of $5.562 billion at the end of FY2021. Once that’s exhausted and what’s on the balance sheet for paid-in capital is exhausted, there’s no more capital to return other than the limit of each year’s net income. In other words, once there’s no more capital to return, it really can’t be called a “capital return program.” This is why I expect the pace of share repurchases to slow no later than the annual capital return program to be announced in April 2023. This doesn’t mean Apple’s in financial trouble. It just means it is coming close to the point all shareholders’ equity including retained earnings and additional paid-in capital will have been distributed (or “returned”) to shareholders in the form of dividends and share repurchases. Unless the company wants to increase liabilities to a level that is greater than assets after returning so much capital to shareholders, but then it wouldn’t be accurately called a “capital return program” anymore.
Apple can continue to return 100% of net income each year in the form of dividends and share repurchases. Beyond that, there’s very little net shareholders’ equity on the balance sheet to return to shareholders. For example, in FY2021, Apple returned more than 100% of net income to shareholders and has been gradually working down shareholders’ equity by adding a portion of retained earnings from prior years. After that runs to zero, there’s no “capital to return” other than 100% of each year’s net income. I expect the dividend to continue to rise and no later than next April, the pace of share repurchases to slow. It’s not the end of the world – again, Apple is not in financial trouble – and the company can continue to repurchase shares. However, I expect the pace of repurchases to slow. That’s all.
You said earlier: “Last fiscal year Apple’s reported net income was $94.68 billion. During the year the company deployed $104.08 billion in capital return-related activities”. That’s a difference of (104/95=) $9B. You also said that “there’s only $63 billion of shareholders’ equity remaining on the balance sheet”. (63/9=) 7 years.
If they don’t change their “capital return activities”, I see little chance they’ll get close to reducing that $63B sufficiently to “slow no later than the annual capital return program to be announced in April 2023”.
Note that I’m not disagreeing with you about the event, only about the definitiveness of the timing. If I had to guess, I’d say it is at least 3 years off, allowing for unknown uses of the cash. But that’s a sheer guess on my part.
Thanks for reframing my point, Jerry. I don’t see Apple reducing buybacks a year from next month without either a massive decrease over the next year in AAPL’s float or a massive secondary use case for their $63 B net cash reserve.
That’s not to say it can’t happen, Robert, or even that I wouldn’t welcome it. But it would be a very big change from the past several years, and thus I find it hard to give the possibility much of a chance.
Look at the stock price chart of IBM for the past ten years. It is the epitome of a company that have become “static” in growth. When I read your comment to Sacto Joe, I am left with the impression that you are presenting Apple going forward more as a static technology company similar with IBM when in actuality, Apple is poised to grow revenues more in the coming years than in previous years.
Apple remains a “growth” company. Apple is moving into several industrial sectors where the potential exists for revenues to grow exponentially, negating your thesis that Apple will slow its pace of share repurchases in the future. Apple is forging ahead in Health & Wellness. All of us believe Apple is on the cusp of exploiting this industrial sector fully in the next few years. The source of revenues and amounts tapped in this industrial sector are “humongous.” Apple has the same opportunity for tapping into exorbitant revenues in the automobile transportation sector with the Apple Car. I see Apple Pay growing solidly in the coming years and the financial payment industry also is a huge source of revenues. Apple Entertainment is in its embryonic stages of development. Most recently Apple announced the addition of “sports” entertainment.
My contention outlined above is that Apple is no IBM. Apple’s growth is not going to stagnate by any means. Apple is firing on all cylinders. Apple never in its history has been poised better to grow huge sums of monies and to exploit humongous new sources of revenues from new industrial sectors as it is poised to do so in the coming years. Apple continues a “cash cow!” What does this mean? It means Apple continues creating stockpiles of money as-far-as-the-eyes-can-see. How does Apple “likely” get rid of this extra cash? Continuing its share repurchase plan at a pace similar with previous years. My biggest concern is not that Apple share repurchases slow, it is if the Progressive Wing of the Democratic Party starts regulating on company buybacks.
As dividends increase at a rate greater than the rate of reduction in the fully diluted share count, dividends are likely to consume more of the capital return allocations. Apple can continue to return 100% of net income each year in the form of dividends and share repurchases. I said no later than April of 2023, I expect the pace of repurchases to slow. That’s all.
at least it was a noticeable number. Given Apple’s large cash position it is a notable number if interest rates go to 2%. Maybe enough to offset the losses of not selling in Russia! Of course currency exchanges headwinds, supply chain issues and other potential issues could make us completely ignore the return on cash number. The odd thing is why Barron’s is writing about this as a positive. The market often doesn’t like it if a company beats its quarter because of passive income like interest.
Jerry: In my view it’s possible Apple’s revenue could grow exponentially. However, because net income growth is the primary driver of Apple’s share price appreciation, any big growth in net income would also move the share price significantly higher. Already it requires more and more cash to have the same percentage impact in terms of reducing the fully diluted share count. When Apple began the share repurchase program with the first purchases in FY2013, the Fed Funds rate was at levels similar to today. Interest rates are expected to rise and over time cash may gain more value to have on hand.
Apple may keep a share repurchase program in near perpetuity and I expect repurchases to continue for a while. My only point is moving forward the capital return program will be funded almost exclusively from net income because historical retained earnings have been pretty much exhausted with the $604 billion returned to shareholders through share repurchases and dividends over the past nine years. Dividends per share will rise at a percentage rate greater than the percentage decrease in the fully diluted share count through repurchases.
If, as you say, Apple’s cash generation rises exponentially, so will the cash commitments to the annual dividend. If Apple’s cash generation rises exponentially leading to exponential growth in net income and corresponding exponential share price appreciation, it would require an exponential increase in the cash commitments to repurchases to realize the same percentage reduction in the fully diluted share count being accomplished now. Based on FQ1 2023 share repurchase activity, I’m expecting about $93 billion committed to share repurchases this fiscal year versus the $92.1 billion deployed for repurchases in FY2021.
Until we see the exponential increase in cash generation I will rely on the documents publicly published by Apple – both the annual balance sheets and the capital return program updates published by the company. When Apple publicly publishes documents in the future evidencing the exponential growth in revenue, cash generation, net income and capital return commitments, I will revise my forecasts. I will always work from documents publicly published by Apple as the basis of my forecasts.
“If, as you say, Apple’s cash generation rises exponentially, so will the cash commitments to the annual dividend.”
Apple has been very steady in raising both its yearly buyback sums and yearly annual dividend increase by about the same percentage. I’m convinced that, once net zero cash is achieved, that will change – but not before.
“Already it requires more and more cash to have the same percentage impact in terms of reducing the fully diluted share count.”
You are, of course, correct that, as the valuation of Apple goes up, buying back some given percentage of the remaining float gets more expensive.
But that’s only an issue if Apple is buying back overvalued stock. It almost seems as if you are suggesting that Apple is in danger of buying overvalued.stock….
Boy, don’t I wish that were true! Because even now, the market has no meaningful appreciation of Apple’s value, and should that ever happen, Donna and I would dance a jig on the street in front of our house!
And, after literally years of buying back insanely underpriced AAPL, Apple suddenly finds itself buying back some relatively small amount of over-priced shares – well, at that point who really cares….
I haven’t said at all that Apple is overvalued at this time or that the shares are currently and insanely underpriced. I value Apple based on comparisons to the value of other equities and very specific criteria unique to my personal goals. Tomorrow I plan to buy some shares for the benefit of a family member. A week or a month from now the equity or equities chosen for purchase might be different.
Joe: I did not say there would be a huge decrease in repurchase activity no later than April 2023. I did say, “I expect the pace of share repurchases to slow no later than the annual capital return program to be announced in April 2023.”
If Apple reduces its share repurchase commitment in April 2023, for example, from $93 billion in repurchases plus dividends this year to $91 billion next fiscal year plus more dividends, it’s a slowing in the pace of repurchases. Again, I did not say the slowing would be huge. I expect the combined capital return program – repurchases plus dividends – to pretty much match projected net income no later than the annual capital return update in April 2023.
“Joe: I did not say there would be a huge decrease in repurchase activity…”
I never said you did! But short of a huge disappearance of the net cash reserve, I don’t see any signs of a “slowing in the pace of repurchased” a year from next month. Three years, maybe. Next year? Highly unlikely.