Tuesday, March 20, 2012

Steve Jobs: "We've Got All This Cash, Warren...What Should We Do With It?"

Here's a follow up post to yesterday's Apple (AAPL) announcement of a quarterly dividend and share repurchase program.

In a CNBC interview back in February, Warren Buffett said that a couple years ago Steve Jobs had called and asked him what to do with all the cash Apple was accumulating.

During the interview, Buffett admitted he wished he had bought Apple's stock then described a conversation he had with Steve Jobs. Apparently, Steve Jobs called Buffett a couple years ago and asked:

"We've got all this cash, Warren...what should we do with it?"

The four alternatives that Buffett says he walked through with Steve Jobs was:

-Stock Buybacks
-Sitting on the Cash

Buffett said he was told by Steve Jobs that they wouldn't need lots of money for acquisitions. So here's what Buffett says he said to him:

"'...I would use it for repurchases if I thought my stock was undervalued.' And I said how do you feel about that? Stock was around 200 and something. He said, 'I think our stock's really undervalued.' I said, 'Well, you know, what better can you do with your money?' And then we talked a while, and he didn't do anything."

Buffett then added...

"I said, look, you can buy dollar bills for 80 cents or 70 cents and you know the dollar bill. I mean, it's not a counterfeit, it's your dollar bill. I said go to it, and the truth was he didn't. He just didn't want to repurchase stock. But he was certainly right about his stock being undervalued."

Well, in retrospect not acting on it at the time was costly but, considering the accomplishments of Apple, it's difficult to be critical in this case.

Few others have ever matched Apple's business performance and accomplished so much in such a short time. That, in itself, is not an excuse. My point is while Apple is a force today not long ago (late 1990s) the company was in far from great competitive or financial shape.

Now imagine you are Steve Jobs having watched Apple barely survive the late 1990s. Ten years later the feeling that the company was now a financial fortress must have been nice.

It's not hard to imagine the thought process being:

Why not let the cash build up so you feel sure to never face that again?

Instead, just focus on making Apple an increasingly great business.

Who knows what Steve Jobs was thinking but I can understand why he might have been cautious financially. It doesn't change the fact that the cautiousness was costly. There'd be many fewer shares outstanding if Apple had acted sooner. The same intrinsic value would spread across substantially less shares (bought cheap) and Apple's spectacular stock would have been more so.

The math is simple. There's no doubt that the persistent repurchase of shares would have led to lots of per share value being created.

So while it was to an extent understandable, as the late 1990s moves further into the rear-view mirror the financial caution clearly makes less sense.

The intelligent use of future cash flows and all that cash on the balance sheet will impact long-term returns substantially.

As I mentioned in the prior post, yesterday's dividend announcement by Apple was a fine step forward but, the stated primary objective of their planned share repurchase was a little disappointing. I'll be interested to see if they have the discipline to buy the stock when cheap but, more importantly, to know not buy it back if the stock happens to become expensive in the future.

"The first law of capital allocation – whether the money is slated for acquisitions or share repurchases – is that what is smart at one price is dumb at another." - Warren Buffett in the 2011 Berkshire Hathaway Shareholder Letter

Apple's a great product company. Sure they sat on the cash too long and had less than optimal capital allocation up to this point but, considering where they have come from, it's somewhat understandable.

With most companies it's best as a shareholder to be less understanding about it. As time goes on that applies to Apple no matter how good they are at what they do.

The amount of per share wealth creation for long-term investors that could be left on the table is far too great.


Long position in AAPL

Related post:
Apple Initiates Quarterly Dividend and Share Repurchase Program
Technology Stocks

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