Apple Is Not in the Market for Game-Changing Acquisitions

Apple (NASDAQ:AAPL) has emerged as the most formidable cash cow on Wall Street. The company generated $22.7 billion in cash flow from operations during its latest quarterly period, ended December 28. In all, Apple closed out its first-quarter 2014 with $158.8 billion in cash and investments above $95.5 billion in total liabilities on the books.

Certainly, the catcalls to return larger portions of Apple capital back to shareholders reached a crescendo alongside Carl Icahn’s recent arrival as a major shareholder. Going forward, Apple investors beating the drum for a major acquisition out of the suddenly conservative Cupertino may be left highly disappointed. Apple is not in the market for game-changing acquisitions.

The Web 2.0 bubble

In recent years, Apple and ExxonMobil (NYSE:XOM) have largely jostled back and forth with each other for the ultimate designation as the world’s largest corporation. Wall Street traders have currently applied a $476.6 billion market capitalization price tag to Apple. For the sake of comparison, Exxon now operates with $409.3 billion in market capitalization. In 2009, Exxon closed out a deal of its own to buy out XTO Energy.

Four short years later, in April 2013, The Motley Fool ripped the XTO acquisition as a “$40 billion mistake” upon weak natural gas prices. In any event, mega-capitalization companies must complete major buyouts worth tens of billions of dollars simply to move the needle at the bottom line. Apple should not kowtow to any pressure to wheel and deal within this irrationally exuberant Web 2.0 bubble.

In 2008, the Federal Reserve Board dropped its target federal funds rate to an unprecedented zero amid the housing crisis and credit bust of that year. Treasury and Federal Reserve officials were to then install the Troubled Asset Relief Program (TARP) and Operation Twist to purchase distressed assets and improve market liquidity.

In total, the Federal Reserve balance sheet was to expand out toward a bloated $4.2 trillion as of March 13. The Nasdaq Composite Index was to recover sharply from 1,632.21 to 4,260.42 between January 2, 2009, and March 13, 2014. Amazon (NASDAQ:AMZN), as part of the NASDAQ Composite Index, now trades for an extraordinary 630 times earnings.

On February 19, Facebook (NASDAQ:FB) announced that it would be acquiring WhatsApp for $19 billion in cash, stock, and restricted stock units. Although WhatsApp services more than 450 million global customers, the messaging application has generated relatively little to no revenue and does not sell advertising space.

Reuters promptly reported that “Silicon Valley observers [were] stunned [by the] lofty price tag” of the deal. Again, Apple executives would be wise to steer clear of the merger and acquisitions negotiating table in this frantic environment. The late Steve Jobs, of course, preferred to develop product in-house.

Returning capital to shareholders

Dividend Declared Date Record Date Dividend Payable Date Dividend Amount
10/06/95 11/24/95 12/15/95 $0.12
07/24/12 08/13/12 08/16/12 $2.65
10/25/12 11/12/12 11/15/12 $2.65
01/23/13 02/11/13 02/14/13 $2.65
04/23/13 05/13/13 05/16/13 $3.05
07/23/13 08/12/13 08/15/13 $3.05
10/28/13 11/11/13 11/14/13 $3.05
01/27/14 02/10/14 02/13/14 $3.05
04/21/14 (Projection) 05/05/14 (Projection) 05/08/14 (Projection) $3.35 (Projection)

Source: Apple financial history

Apple has already pledged to return $100 billion back to shareholders by the end of 2015, in the form of dividends and buybacks. As part of this pledge, Apple sold $17 billion worth of bonds on April 30. Apple leveraged the low interest rate environment to lock in rates between 0.45 percent and 3.85 percent for its bonds. At the time, Bloomberg reported that Apple sold bonds in order to avoid taxes upon the repatriation of its overseas cash pile. Again, Apple generated $22.7 billion in Q1 2014 cash flow from operations. For now, money is of little to no issue at Apple.

On August 16, 2012, Apple executed its first dividend payout in 17 years. Apple was to then raise its quarterly dividend from $2.65 to $3.05 over the next three quarters. Going forward, Apple shareholders may expect to receive a $3.35 quarterly dividend out of Cupertino on May 18. The $3.35 amount would mark a 10 percent increase in payout and carry Apple’s dividend yield above 2.5 percent.

In February, CEO Tim Cook disclosed to The Wall Street Journal that Apple bought back $14 billion of its own shares within the span of two weeks. Cook took advantage of a “surprise” dip in Apple stock to get “aggressive” and load up upon shares. Apple shares were to promptly rebound from the January 31 multi-month low at $493.55 toward $530 heading into March of this year amid the accelerated buyback program. Future buybacks may improve earnings per share by as much as 5 percent over the next year.

Over the past year, Apple has put many irrational fears to rest for prospective investors. First and foremost, Apple will not buckle to the misguided jeers pressuring management to forge costly acquisitions. Secondly, Apple will purchase its own stock at opportune price points, rather than simply blowing cash near market highs through autopilot buybacks. Apple stock is a solid long-term investment.

Disclosure: Kofi Bofah owns shares of both Apple and Exxon.

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