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Apple’s Cash-Flow Problem

CAMBRIDGE – I recently examined the problem of corporate short-termism from two nonstandard angles. One was that some short-termism is sensible. Large firms face an increasingly fluid economic, technological, and political environment – owing to more global and competitive markets, to the greater potential of technological change to alter firms’ business environment, and to governments’ growing influence over what makes business sense. In this fluid environment, large companies must be cautious before making large, long-term commitments.

Second, I described how emerging data could suggest measurement problems with the conventional wisdom that more rapid trading in financial markets is making them more oriented to the short term than ever before. Proponents of this view point to furious trading in New York and London, with average holding periods for major stocks diminishing in recent decades. In fact, the change may be driven by a rapidly trading minority, and not by major stockholders shortening their holding periods. Indeed, the average holding period for America’s core shareholders, like Fidelity and Vanguard, has increased in recent decades. (I examine these issues in greater depth in a longer forthcoming article.)

The shareholder activism around Apple highlights the importance and controversy of the short-term problem. Apple has been spectacularly successful in the past decade. Its products, from iPhones to iPads to MacBooks, have captured consumers’ imaginations, remade markets, and earned the company and its shareholders huge sums of money. Apple’s stock capitalization has soared, and it became the first trillion-dollar company.

As Apple’s profits have grown, it has amassed $137 billion in cash, according to a recent count – more than it can profitably use (at least for now) in its operations. So the company has wisely left its cash invested in global financial accounts, not business operations. Meanwhile, its staggeringly successful products are generating still more cash to handle and stockpile.