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This Is What Apple Inc. (AAPL) Earns on Its Cash

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Apple Inc. (NASDAQ:AAPL)‘s cash problem has been the talk of the town lately. Just this week, two prominent fund managers were out discussing ways that Apple Inc. (NASDAQ:AAPL) could improve its capital allocation strategy by giving more of its money mountain back to investors.

Bill Miller suggested Apple Inc. (NASDAQ:AAPL) return all future free cash flow to investors, which would be a substantial increase from current payouts. David Einhorn thinks issuing a share class of perpetual preferreds that yield 4% is the way to go. Shares put up meaningful gains on both occasions as investors contemplated the better uses of Apple’s cash.

Apple Inc. (NASDAQ:AAPL)As far as how all those dollars do right now, we might as well look at what Apple Inc. (NASDAQ:AAPL) earns on those investments.

Hiding in plain sight
Apple discloses what it earns on its cash investments in its SEC filings. Some of these returns (more on this later) are included on its income statement within its other income and expense, or OI&E, line item. The company’s OI&E has been rising over the past couple of years primarily due to increased interest and dividend income on its cash investments.

These gains are partially offset by increased premium expenses on some of its derivative contracts that it uses to hedge foreign exchange movements and other cash flows.

Metric FY 2011 FY 2012 Q1 2013
Total OI&E $415 million $522 million $462 million
Realized gains on cash investments $110 million $183 million Not significant
Unrealized gains on cash investments at end of period $264 million $1.05 billion $951 million
Unrealized losses on cash investments at end of period ($158 million) ($20 million) ($87 million)
Total cash at end of period $81.6 billion $121.3 billion $137.1 billion

Source: 10-K and 10-Q filings. FY = fiscal year. Total cash includes short-term and long-term marketable securities.

I know some of you mathematicians out there are preparing to whip out your trusty calculators in order to calculate what percentage rate of return those figures represent. Let me stop you right there.

Not enough info
For any investment portfolio — be it your $2,000 IRA or Apple Inc. (NASDAQ:AAPL)’s $137.1 billion cash pile — with regular cash inflows and outflows, the most appropriate measure of return is a time-weighted rate of return. In order to calculate this figure though, you need to know the timing and amount of all inflows and outflows during the period. Since we mere mortals (i.e., public investors) are not privy to this information, we simply can’t calculate Apple’s time-weighted rate of return even though we know how much it made it absolute dollar terms.

We can look at the cash flow statement to see how much cash it uses to purchase marketable securities ($37.2 billion in fiscal Q1) and its proceeds from sales and maturities ($26.5 billion in fiscal Q1), but those aggregate figures for the entire period still aren’t enough.

A quick accounting refresher
Apple classifies its marketable securities as available-for-sale. This means that they are held on the balance sheet at fair value and subsequent unrealized gains and losses bypass the income statement and get recorded in other comprehensive income. Only realized gains and losses are shown on the income statement. This is why the unrealized figures in the table above are not included in the OI&E total.

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