cash cow

From Star Growth Company to World’s Biggest Cash Cow

Before tackling what turns out to be the not-so-novel question, “Is Apple the New Microsoft?,” I thought I’d check Google to find out how many other people had the same thought.

Answer:  a lot.

Even more interesting, though, was when the query (observation?) first started popping up:  at least as far back as 2005.

appleIn other words, before Steve Jobs’ illness became public, before the iPhone, iPad, and before lots of other innovations that cumulatively generated more than $1 trillion in sales, leaving the company with a ginormous $100 billion pile of cash (see below).

Finally Timely

Unlike before, though, the question, “Is Apple the new Microsoft?” finally appears to be timely.

That’s because for the first time in a decade, the company’s earnings are falling, at least temporarily.

There are lots of reasons, but ultimately the main one appears to be that the company’s trademark franchises, the iPhone and iPad, have now been eclipsed by competitors’ superior performance, lower price — or both.

Installed Base; Legacy Rents

Fortunately for Apple, such a development doesn’t necessarily spell instant doom.

It’s been a decade since Microsoft has been considered technologically innovative, yet it still reaps billions of dollars annually in what I’ll charitably call “legacy rents” (“monopoly tax” would probably be more accurate.)

Thanks to a “sticky,” installed base numbering  in the tens (hundreds?) of millions, Microsoft has been the world’s biggest cash cow since — I dunno, 2000(?) — milking its pantheon of software once-greats (Windows operating system, Office suite of software, etc. ).

Comparing Apples & . . . uhh, Oranges

Now, Apple appears to be following the same path.

If anything, its key franchises — the iPhone and iPad — tap bigger global markets than Microsoft’s products.

Unfortunately, that big plus is at least partially offset by these three negatives:  1) the pace of change in Apple’s markets (mobile, phones, tablets) is faster; 2) its key Microsoftcompetitors (Samsung, HTC, and Google) are bigger and more nimble; and 3) its customers’ ties to its products are more attenuated.

Bottom line:  Apple may turn out to be a richer cash cow than Microsoft, at least initially, but it may not have the same staying power (or anything close).*

$15 Billion in Bonds

Will that matter?

It might, if you just bought a 30-year bond from the company, paying a rather modest 2.5%.

Likely to fare better:  stockholders, whose return is going to come much faster, in the form of $75 billion in dividends to be paid out over the next two years.

Borrowing (Cheap) to Pay Dividends

So, is Apple finally parting with its mountain of cash?

cashNot exactly.

For one thing, it’s still coming in the door faster than it’s going out.

That’s what 50% margins — or 95% margins, in the case of software — will do.

For another, the money to pay the dividends — or at least the first $15 billion — is actually being borrowed.

That’s explained by two things:  1) Apple’s cash hoard is held abroad, and would be taxed if brought back to the U.S.; and 2) thanks to the Fed’s ZIRP policy (zero percent interest rates), Apple can borrow money in the credit markets practically for free.

*Query:  would that eventually make it a “cash goat??”

About the author

Ross Kaplan has 19+ years experience selling real estate all over the Twin Cities. He is also a 12-time consecutive "Super Real Estate Agent," as determined by Mpls. - St. Paul Magazine and Twin Cities Business Magazine. Prior to becoming a Realtor, Ross was an attorney (corporate law), CPA, and entrepreneur. He holds an economics degree from Stanford.

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