Moody’s: Apple Inc Cash Pile Rundown Is “Credit Negative”

Apple Inc (NASDAQ:AAPL) is the corporate world’s most notorious cash hoarder. At the end of December, the company had accumulated a cash pile of $285 billion, the record for the iPhone producer.

The company is a hoarder for a good reason. When under the stewardship of Steve Jobs, it had a close run-in with bankruptcy and following this, the founder wanted to make sure that the business would survive anything else the world could throw at it.

However, it seems that Apple’s current management is no longer willing to take the seam cautious approach. On the company’s fourth quarter and full-year 2017 earnings conference call it announced, following US Tax reform, it will seek to eliminate it’s net cash pile entirely. After deducting debt, at the end of the reporting period, the group had $163 billion of cash on the balance sheet.

Moody’s: Apple’s Cash plan is bad for liquidity

Most analysts have been expecting the company to announce higher cash returns to investors, in the form of buyback or dividends, but almost none had expected the group to adopt such an aggressive war against cash. It is not just the existing cash balance Apple will have to find a home for; the firm is currently generating free cash of around $40 billion a year after dividends, which is enough to swallow up around 5% of its shares annually.

But there’s no denying that by reducing net cash to zero the company will increase its risk profile. Apple already has $122 billion in debt and according to credit rating agency Moody’s, an adjusted debt/ EBITDA ratio of just over 2x at the end of 2017 including a tax repatriation liability of $38 billion, payable over eight years.

That being said, now that Apple can access its overseas cash without having to pay hefty financial penalties, the credit rating agency expects the adjusted debt / EBITDA ratio to decrease to the low 1x range over the next few years. Of course, this depends on how aggressively the company decides to lever up its balance sheet and how earnings trend over the next few years.

Generally speaking, Moody’s believes that Apple’s plan to reduce its net cash balance down to zero is “credit negative” because it “would signal a substantial weakening of the company’s liquidity.” Although, a report on the topic goes on to note that even with “a net debt balance of zero, Apple would still have a robust financial profile with financial metrics that compare favorably with other high rated companies.”

About the Author

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob Wolinsky Email -