🔒 WORLDVIEW: Apple cedes its Cash King crown to Google

By Felicity Duncan

For around a decade, Apple held the dubious honour of being the listed company with the world’s largest cash hoard. At the end of 2017, Apple was sitting on a cash pile of a staggering $163 bn. That’s about the size of the GDP of Qatar or Hungary.

But recently released figures show that its financial reserves have fallen to $102bn. That means that Google is now King of Cash with its $117bn slush fund.
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Now, this is more than a fun fact. You see, it’s crazy for a business to sit on a giant pile of cash. For a business, a cash pile is a liability, a statement of failure. Idle cash is anathema to what business is all about, which is generating a return on invested capital.

The fundamental idea of a business is that it takes capital and employs it productively to generate growth and future cash flows. Those cash flows should either be reinvested to generate more growth and still bigger future cash flows, or they should be paid out to shareholders in the form of dividends.

You see, anyone can hide a suitcase of money under the bed. But in a few years, that suitcase of money is just… a suitcase with the same amount of money in it. Investing that suitcase of money in a business is meant to transform it into more.

Google and Apple have historically been very, very good at generating returns on capital the way businesses are supposed to. In fact, Apple is the world’s best when it comes returns on invested capital (ROIC), and Google ain’t too shabby either.

This table shows how efficiently these two companies are able to deploy money. As you can see, they are both very good at turning cash into lots and lots more cash.

So why, then, are both of them hoarding cash like Smaug the dragon? Surely they should be investing it in order to generate still more returns?

This issue has been a puzzler for a while. In fact, activist shareholders at Apple have been targeting its cash pile for years. But there are a few clear reasons for this dragon-like behaviour.

Part of the explanation for the hoarded liquidity has been taxes – Apple and Google have both preferred to keep cash offshore to avoid incurring penalty taxes. Now that changes to US tax legislation have reduced those penalties, the companies are likely to repatriate more of that cash and hand it out to shareholders in the form of dividends or share buybacks (which boost a company’s metrics but don’t actually count as a productive investment of cash). Already, both companies have accelerated their buyback programs – it’s a major part of why Apple’s cash pile has shrunk.

But another big part of the issue is that both companies seem to have maxed out their ability to generate returns on new investments.

Google has spent billions on Other Bets like self-driving cars and smart home gadgets, but those have just been, for the most part, money sinkholes. Similarly, Apple’s cash cow, the iPhone, has brought home most of the company’s bacon and its investments in other products look likely to have a much lower return. The move to services, for example, is going to require a big input of capital to create video content and so on, and the returns reaped per dollar will likely be lower than those on the iPhone.

Things have been quiet on the acquisition front too. US regulators are taking a particularly dim view of tech giants these days, and both Google and Apple are facing a blizzard of competition investigations. Now is clearly not the time for them to bolster their market dominance by buying the competition.

For the last 15 years or so, Google and Apple have been two pillars of the US stock market, accounting for an outsize proportion of its growth in earnings and market cap. They have helped transform the US economy and generated unimaginable levels of wealth.

But their persistent cash piles suggest that those days are over. Lacking meaningful investment options, the two companies have accumulated vast gobs of idle cash and there’s nothing left for them to do with it but to release it back to shareholders and let them find the next big thing to invest in.