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Friday, February 08, 2013, 07:46 am PT (10:46 am ET)

Overseas cash restricts Apple's options for reallocating capital

With Apple actively exploring potential uses for its $137 billion in cash and investments, bringing all of that money back to the U.S. would be a costly move.

About 70 percent of Apple's cash balance is held overseas, and repatriating that money would have it taxed at America's 35 percent corporate rate. As noted by analyst Amit Daryanani of RBC Capital Markets, that means bringing the money stateside would cost Apple $33 billion.

But Apple also currently has $43 billion in cash domestically, which Daryanani believes, along with another $45 billion in annual free cash flow, provides Apple enough room to return additional cash to investors.

Cash

Apple added $38 billion in cash in 2012. Chart by Asymco.


Scrutiny of Apple's $137 billion in cash and investments grew considerably on Thursday after it was announced that David Einhorn, the high-profile hedge fund manager behind Greenlight Capital, has sued Apple over what he believes is a "cash problem" for the company. Einhorn believes Apple should return some of its cash to investors in the form of perpetual preferred stock with a 4 percent yield.

Apple quickly responded and reiterated that the company has been holding "active discussions" on what to do with its massive sum of cash. Apple also promised to "thoroughly evaluate" the proposal from Greenlight Capital.

The discussions suggest Apple's upcoming annual shareholder meeting could be particularly interesting, though Daryanani doesn't expect the Feb. 27 event to bring about any changes to the company's capital allocation policy.

"Given Apple's history of announcing products and changes to capital allocation policy through company specific events, we believe any change to capital allocation policy would likely occur in the March time frame after the annual shareholder meeting," he said, noting that Apple announced their dividend buyback on March 19 of last year.

Daryanani believes Greenlight's proposal would "get the stock moving upwards in the near-term." He also said that Apple has "ample cash" to fund a new, larger dividend.

RBC Capital Markets has an "outperform" rating for AAPL stock with a price target of $600. The firm believes Apple deserves to trade at a slight premium to the S&P 500.