Barron's: Apple could get a $4B windfall in 2023 from higher interest rates

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.

27 Comments

  1. David Emery said:
    Don’t forget all that $ that Apple has borrowed at ‘valley rates’ over the last couple of years!

    2
    March 18, 2022
  2. Jerry Doyle said:
    “Cash Rich!” The gift that keeps on giving 🙂 … in more ways than one!

    3
    March 18, 2022
  3. Daniel Epstein said:
    Somehow I don’t consider the interest I receive for my cash holdings in various accounts as a “windfall”. Now when Interest rates were close to 4%
    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.

    1
    March 18, 2022
    • Robert Paul Leitao said:
      Daniel: There’s about $80 billion in net cash. If one subtracts from the cash and marketable securities the cash borrowed over the years to fund repurchases, it’s a much different number. The press has often been enamored with Apple’s reported cash balances. Few consider the debt offsetting the cash.

      1
      March 18, 2022
      • Daniel Epstein said:
        Of course in the case of interest being paid to Apple the rate is applied to the current cash balance. Which is the larger figure depending on how it is held. The debt interest rate cost is usually fixed when the debt is issued unless it is a variable interest issue. And the debt interest is a cost so it is an expense that is deductible. So 2% on 200 billion would add 4 billion. Might even be able to pay the debt interest with some left over. Still not a big deal in the Apple revenue story.

        0
        March 18, 2022
        • Robert Paul Leitao said:
          Daniel: According to the 10-K for the fiscal year ended last September, cash paid for interest last fiscal year was $2.687 billion.

          1
          March 18, 2022
  4. Robert Paul Leitao said:
    Jerry said: “My contention and where you and I disagree is that I see Apple’s growth in revenue growing exponentially going forward, resulting in a level of excess cash precluding the company to slow its share repurchasing program as you prognosticate. That difference is the distinction I wish to make known to you and all on Apple 3.0.”

    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.

    0
    March 21, 2022
  5. Robert Paul Leitao said:
    Joe said: “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.”

    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.

    0
    March 21, 2022

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