Apple is the largest company in the world by market capitalisation and is currently valued at nearly $900 billion. Apple has constantly been in the media for the sheer amount of money which it has – investments of around US$200 billion. No other company in the world has as much money as Apple does.
Why does the firm hold so much cash compared to every other firm in the stock market?
1) Excess Cash: Apple, as a business, is a cash generating machine. The firm has generated around US$40-US$50 billion dollars in profit every single year. Apple's meant that the firm has earned huge sums of money and generated massive sums of free cash flow.
2) Taxation reasons: Much of the money which Apple earns is generated overseas. Should funds be 'repatriated' to the United States, they would be subject to a significant amount of taxation. Instead of paying this tax, Apple long preferred to hold its cash overseas rather than bring it back into the United States. As Apple's overseas sales have grown, so has its cash pile.
Trump's repatriation policy has however helped to ease some of these restrictions.
3) Low Cost of Capital: Due to Apple's reputation and excellent credit rating, it is able to obtain money at an extremely low cost. The firm has e regularly chosen to borrow funds at rates of 1-2% rather than using its own cash.
4) Research & Development Intensive Industry: Given that Apple operates in an industry in which innovation is crucial, it is essential that the firm has a strong cash position to fund its research and development projects. Apple's large cash reserves have allowed them to constantly explore new opportunities and be the first to market.
5) Lack of intelligent investment opportunities: With so much money, Apple is unable to find sufficient 'short-term' investment opportunities.
What the future holds for Apple's cash hoard.
Apple's management has suggested that it aims to reduce the cash pile. The company realises that this is not exactly an efficient way of operating, particularly if its investors could better invest the money themselves. Apple's inefficient capital structure is one of the reasons the company was so cheaply priced by the market for so many years and potentially one of the reasons why Warren Buffett chose to invest in the company
