Too much Cash?

Too much cash.

Is such a thing even possible?

Well, when it comes to both personal finances and corporate finances, the answer is the same….maybe. Stories of people winning the lottery and blowing through it all in a few years, or heirs squandering their inheritances, are the stuff of urban legend. Spending limits on credit cards, and trusts that deny access to inherited wealth until the heirs have “matured,” are some of the more common tools used to try to control the tendency of people to spend recklessly when they are “flush.”

The same thing, however, can be said of companies. Cash is a necessary tool to use in business. It helps maintain debt covenants, firms need it for daily operating expenses, and it is always prudent to have some “dry powder” around in case of any unexpected events. Corporate treasury and finance departments put a lot of time and effort into cash management procedures in their quest to balance the need for liquidity, and the fiduciary duty to generate the highest return possible for their stockholders.

Sometimes, however, as in case of Apple, Inc., the amount of cash that the firm has on hand is mind-boggling. Firms accumulate cash as a result of profitable operations and sound management practices, but sometimes firms are tempted, when flush, to mirror the behavior of people and to spend unwisely. While many management teams who embark on a buyback program do indeed feel that their firms stock is undervalued, and that by purchasing shares they will help the market recognize the true value inherent in the company, there are other benefits. When net income and other earnings metrics are divided by a smaller base (number of shares outstanding), they go up, the stock price goes up, and stockholders have more valuable assets.

Sounds great, right?

As if often the case, however, things do not always go according to plan. Management misjudges the proper clearing price of their stock and overpays (happens all the time), the market takes the buyback as a sign that management has no operational ideas and punishes the stock, or the net effect of the stock purchases is zero due to the granting of options to executives or as part of the compensation package.

I have some links here discussing the growing cash pile at many companies, Apple’s buyback program, and an article outlining some of the pitfalls of buybacks.

Happy Reading!

http://seekingalpha.com/article/1334571-more-bad-news-for-stock-buybacks

http://www.cnbc.com/id/100911328

http://bgr.com/2013/07/25/apple-stock-buyback-q3-2013/

http://www.businessinsider.com/apple-spent-16-billion-buying-apple-stock-last-quarter-2013-7