For fun let’s turn to Apple and perform some back of the envelope calculations. Also we would like to highlight our concept on Solvency. See under “Key Concepts” tab our red square called Solvency. We have written two blogs on Apple, which you can refer to: here and here.
First, we can compute the Solvency Ratio for Apple as at December 31, 2011 (below numbers in ‘000,000)
Total Assets = $138,681
Accumulated Depreciation = $4,011
Net Plant & Equip = $7,816
Inventories = $1,236
Total Liabilities = $48,627
Solvency Ratio = 2.75
As illustrated we have indicated where on the Solvency Curve Apple Solvency Ratio belongs. This would place Apple in what we would call “Super Solvent” territory. This is no surprise considering the often talked about $100 billion dollars Apple currently has on hand.
What if Apple paid a dividend of $75 billion dollars? What would happen to the solvency ratio?
Total Assets would be reduced by $75,000, therefore;
Solvency Ratio = 1.21
Subsequent to the $75 Billion dollar distribution, our readers can see the impact on the solvency ratio. The solvency ratio would go from a “Super Solvent” condition to a “Solvent” one. We have color coded our chart to reflect what we consider optimum conditions for our solvency ratio – the green zone. (A solvency ratio from 0.499 to 1.7)
What would happen if Apple changed its’ solvency ratio?
The market value of the company would increase. How much? We are not sure because our other “concepts” would come into play, like convexity. The question would involve a circular calculation. A POSITIVE CIRCULAR EQUATION! Every time the stock price would increase a new calculation would compute a new model price. Suffice to say the increase in market price would more than make up for the $75 Billion dollar dividend paid by management.
The Economy Economizes
Both ends of the solvency curve are a highly inefficient state. Public markets are a feedback mechanism to reflect these inefficiencies. Apple is inefficiently structured, in terms of solvency, and by reducing this inefficiency the market will reward management and their shareholders.
Economic Boost to the US Economy
Reading the political tealeaves, the dividend tax rate looks to be going up, especially on higher income taxpayers. By paying this dividend by the end of this tax year, and maybe before the November presidential election, taxable shareholders would keep more after tax dollars.
Also by returning $75 Billion dollars in capital to high technology shareholders this capital could hopefully be reinvested in other technology companies, especially start ups in Silicon Valley, which would further enhance the recovery of the US and global economies.
Win Win for everybody!