FA Center: Apple’s enviable cash hoard is dwindling — and that’s surprisingly good news for the stock price

by | Aug 5, 2022 | Stock Market

Apple’s cash position is plunging, and that’s positive for both the business and the company’s shareholders. Yet many investors and Wall Street analysts see signs of trouble that Apple’s
cash and short-term investments have shrunk to $48 billion as of the end of June 2022 from $107 billion at the end of 2019 — a decline of 55%.

According to a longstanding theory in corporate finance, companies with cash hoards underperform those with smaller savings accounts, on average. This theory was laid out several decades ago by Michael Jensen, an emeritus professor of business administration at Harvard Business School. In a now-famous 1986 article in the American Economic Review, Jensen argued that companies would be less efficient to the degree they hoarded cash above and beyond what was needed for current operations.

Why would too much cash be a bad thing? Jensen theorized that it encourages corporate managers to engage in foolish behaviors. Jensen argued that shareholders should try to “motivate managers to disgorge the cash rather than investing it at below the cost of capital or wasting it on organization inefficiencies.” That’s the theory. But does it hold up in practice? To get insight, I reached out to Rob Arnott, founder of Research Affiliates. Arnott was co-author in 2003 (with Cliff Asness of AQR Capital Management) of a study that provided empirical support for Jensen’s theory. Their study, which appeared in the Financial Analysts Journal, was entitled “Surprise! Higher Dividends = Higher Earnings Growth.” They analyzed corporate earnings growth over 10-year periods between 1871 and 2001 and found that earnings grew the fastest following years in which companies’ dividend-payout ratios were the highest. Companies that hoarded their cash instead of distributing it to shareholders performed more poorly, on average. In an interview, Arnott said he believes the conclusions he and Asness reached two decades ago are still valid. He therefore considers Apple’s shrinking cash hoard to be a positive for the company’s future prospects. What if Apple in the future needed the cash it no longer has? Arnott replied that the company would only need to approach the debt or equity markets to raise the cash, which it would have no trouble doing — provided it was going to use the cash for a productive purpose. T …

Article Attribution | Read More at Article Source

Share This