Dell Inc. (DELL), Apple Inc. (AAPL) & Icahn: A Bad Trade-off?

In other words, the main argument against Icahn’s plan is a variation on the arguments used against Apple’s original capital return plan. It therefore suffers from the same flaw. Arguments that Apple should “invest” its cash rather than returning it to shareholders assume that the two are mutually exclusive.

However, for a company in Apple’s position — with more than $100 billion in net cash and annual free cash flow around $40 billion — returning cash to shareholders does not require economizing on R&D, capital expenditures, or other investments. Apple could buy back $150 billion of stock with just its net cash and one year of free cash flow. That would leave all of Apple’s future free cash flow for incremental investments in the business.

That should easily suffice for Apple Inc. (NASDAQ:AAPL)’s needs. Innovation need not be especially expensive. Apple developed its top product — the iPhone — on an R&D budget of less than $1 billion annually. Throwing tens (or even hundreds) of billions of dollars into incremental R&D or acquisitions will probably produce a poor return on investment. Since Apple has more cash than it can productively use, returning it to shareholders is probably the right thing to do.

Foolish conclusion
Carl Icahn’s involvement with Dell Inc. (NASDAQ:DELL) demonstrates how activist investors can be quite dangerous for troubled companies. Icahn is looking to extract value from Dell Inc. (NASDAQ:DELL) by loading lots of debt onto the company in order to squeeze out as much money as possible. However, the company’s cash flow has become less certain due to the secular decline of Dell’s PC business. This makes Icahn’s plan for Dell incredibly risky for shareholders; an unexpected deterioration in cash flow could send the company into a death spiral.

Icahn’s plan for Apple may look similar at first glance. After all, he believes Apple should issue as much as $150 billion in debt to fund its buyback. However, unlike Dell Inc. (NASDAQ:DELL), Apple Inc. (NASDAQ:AAPL) has over $100 billion in the bank and generates around $40 billion in annual free cash flow. In other words, Apple has plenty of cash to pay a dividend, fund a massive buyback, and invest in R&D to drive further innovation. Carl Icahn’s activism poses no credible danger at all.

The article Carl Icahn Is No Threat to Apple originally appeared on and is written by Adam Levine-Weinberg.

Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple.

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