What has to be done with Apple's cash hoard?

The maker of the iPhone, iPad, iPod and iMac computer has accumulated a cash pile that totals nearly $46 billion, the biggest cash hoard among US technology companies.

And yet, due to an ultraconservative investment strategy and low interest rates, that cash is earning next to nothing for Apple, which rarely makes acquisitions and does not pay a regular dividend or buy back stock. “Oppenheimer probably has the most enviable CFO job on the planet,” joked Creative Strategies analyst Tim Bajarin, who has been following Apple since the early 1980s.

Analysts say Apple’s near-death experience in the 1990s helps explain why it likes to remain liquid by investing in safe but low-yielding US Treasury and agency debt.

Despite the low returns, Apple does not face much pressure to put its cash to better use. Any dissenting investors are probably appeased by the meteoric rise in the company’s share price, which has tripled since 2007 to just under $262.

“When a company is growing as fast as Apple, cash management is pretty far back in people’s thoughts,” Pacific Crest Securities analyst Andy Hargreaves said.

“But that’ll change at some point,” he added, estimating that Apple’s cash could hit $65 billion by the end of fiscal 2011 if the company continued to generate free cash flow at the current pace. For now, Oppenheimer has a mantra that he repeats on every quarterly earnings conference call: He says Apple’s investment priority is the “preservation of capital” with a focus on “short-dated, high-quality investments.”

Bajarin said Oppenheimer’s cautious approach dates from his time at Automatic Data Processing, but that Apple’s conservatism is also driven by its chief executive, Steven P Jobs. Both, Jobs, 55, and Oppenheimer, 47, subscribe to the Silicon Valley maxim that “only the paranoid survive,” he said.

They remember the dark days when Apple was struggling to stay alive and had to lay off thousands to cut costs. When Oppenheimer joined the company in 1996 as its controller for the Americas, a series of bad management decisions had eroded profits and sent its share price diving to less than $5. Things got so bad that one of the first things Jobs did when he returned to Apple was take a lifeline in the form of a $150 million investment from Microsoft in 1997.

While those days may be long gone, fiscal prudence could be here to stay. Apple’s financial estimates are almost comically conservative, delivered every quarter by Oppenheimer, who has rarely strayed from the script since he became finance chief in 2004. The company, based in Cupertino, California, runs a tight ship: Total revenue rose 75 per cent from fiscal 2007 through 2009, while operating expenses rose just 45 per cent.

Although Apple is famous for innovation, research and development costs account for only 3 per cent of revenue - far lower than at Microsoft and Cisco Systems, due in part to Apple’s narrow product portfolio. Production costs are also kept low because of Apple’s use of contract manufacturers like Foxconn International Holdings. The only big-ticket spending that Apple has disclosed is a $1 billion data centre that it is building in North Carolina, which is expected to be completed by the end of the year.

While many tech companies are awash in cash, they tend to put it to good use. For example, Intel and Microsoft pay dividends; Cisco and IBM buy back chunks of stock; and Hewlett-Packard and Oracle are serial acquirers. Apple makes few acquisitions because it develops products internally and pays little for what it does buy. Analysts say, they do not expect Oppenheimer to make significant bets with Apple’s cash in the next few years.

Jobs has said that Apple could do something “big and bold” if needed, but he has also expressed no interest in a share buyback or a dividend. The company last repurchased shares in 2001 and scrapped its last dividend after 1995.

“I’m not as concerned as some shareholders might be about their immediate plans for cash; I prefer that they not rush,” said chief executive officer Erick Maronak of  Victory Large Cap Growth Fund, which has Apple as its largest holding.