Apple Inc. (AAPL) Has No Choice

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Even in the land of the free, sometimes you still don’t have a choice.

Apple Inc. (NASDAQ:AAPL)‘s annual shareholder meeting takes place Wednesday in Cupertino. Just days before the meeting, David Einhorn was able to score a symbolic victory in his legal battle with the Mac maker and Apple Inc. (NASDAQ:AAPL) is being forced to remove the vote over “Prop 2” from its proxy as a result, since the proposal bundled three different amendments to Apple’s corporate charter that were intended to improve corporate governance.

Apple Inc. (NASDAQ:AAPL)The larger issue at the heart of the dispute was Apple Inc. (NASDAQ:AAPL)’s swelling cash balance, which has grown to absurd levels of $137.1 billion — larger than the entire market caps of other tech and telecommunications giants like Intel Corporation (NASDAQ:INTC), Inc. (NASDAQ:AMZN)QUALCOMM, Inc. (NASDAQ:QCOM), or Verizon Communications Inc. (NYSE:VZ).

As the iMoney mountain grows, so does investor discontent, since that cash isn’t doing a lot of good idling on the balance sheet. In fact, quite the contrary is true. The inflated asset and equity values on the balance sheet are a drag on several financial metrics that investors carefully track, such as return on equity.

We have too much money
The problem that Apple Inc. (NASDAQ:AAPL) is running into is simply that it makes too much money and doesn’t give enough back to its shareholders, relatively speaking. Apple has now explicitly said that it reached a point “early last year” that it had more cash than it needed to fund operations and maintain strategic flexibility. That was $40 billion ago.

That’s precisely why Tim Cook made the move to re-initiate Apple Inc. (NASDAQ:AAPL)’s dividend after a 17-year hiatus and institute a share repurchase program to offset equity dilution related to share-based compensation. However, even as the $45 billion that Apple plans on returning to shareholders ranks high in absolute dollars, Apple’s sheer cash-generating capabilities make that figure seem paltry.

Just look at the sliver of cash that Apple has given back so far.

Source: SEC filings. Calendar quarters shown. Cash returned includes dividends and buybacks.

This chart doesn’t include the roughly $3 billion that Apple has returned so far in 2013 ($2.5 billion in dividends and $500 million in buybacks in the first quarter). That brings the total cash returned thus far up to $10 billion, nearly a year after the programs were initiated.

We make too much money
Apple’s cash flow is nothing short of astounding at this point. Both operating cash flow and free cash flow in its fiscal first quarter alone were greater than all of fiscal 2010.

Source: SEC filings. Fiscal periods shown.

At the rate at which Apple is collecting cash relative to the rate at which it’s giving back to shareholders, Apple simply has no choice but to increase its payout. What form this takes remains to be seen — be it an increased yield on the common shares, a large special one-time dividend, a new class of perpetual preferreds like what Einhorn proposes, an increased buyback authorization, or some sort of combination of all of the above.

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