Question

Apple Inc., has is holding a tremendous amount of cash. Most is held overseas where the profit was made. In the past several years they started paying dividends by borrowing by issuing bonds. The have similarly repurchased large amounts of shares. Do you think this is in the best interests of shareholders? What do you think Apple should do with their cash position? Why do you think they are holding onto so much cash?

Answer 1

Shareholders invest their money into the company and expect a certain return on their investment in the form of dividends. Dividends are generally paid out of the cash profits earned by a company. But Apple Inc. is paying dividends by borrowing by issuing bonds. Bonds carry certain rate of interest which has to be paid irrespective of profits of the company. Also, in the event of liquidation, debt is repaid before any money is paid back to the shareholders. By issuing more debt the company is creating fixed charge in the form of interest which will lead to fewer income for the shareholders. Also, the certainty of shareholders to receive back the investment reduces. Hence the policy followed by the company is not in the best interest of the shareholders. Apple should rather use the large amounts of cash it has to distribute dividend to the shareholders. Also any buyback should be done with the cash balance it has. It might have some projects planned up in the future that requires investment for which it is holding on the cash.