# Corporations that have large amounts of cash, why don't they reduce their debts? **URL:** \ **Category:** Factual Questions\ **Created:** [April 24, 2013, 7:55pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618 "2013-04-24T19:55:20Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [April 25, 2013, 1:36pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/21 "2013-04-25T13:36:34Z")
> [@dotchan](#): > > Yeah, but how much risk are you assuming by investing in a fund? Little, but not zero. It’s an amount of risk that I’m comfortable with. > [@](#): > > Mortgaging your house to buy stocks doesn’t seem like a good long-term plan for your money. That really depends on the terms of the mortgage and what your risk tolerance is. I’m not exactly taking an interest-only loan to short FOREX futures, here. Index funds are about as conservative an investment as you can make while still being in equities. ---
**Author:** ![Colophon](https://avatars.discourse-cdn.com/v4/letter/c/f05b48/32.png) [@Colophon](https://boards.straightdope.com/u/Colophon)\ **Post date:** [April 25, 2013, 1:52pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/22 "2013-04-25T13:52:21Z")
> [@ZipperJJ](#): > > As a small business owner, 1-billionth the size of Apple… You have less than $40 in cash? 😛 ---
**Author:** ![gazpacho](https://avatars.discourse-cdn.com/v4/letter/g/6f9a4e/32.png) [@gazpacho](https://boards.straightdope.com/u/gazpacho)\ **Post date:** [April 25, 2013, 2:28pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/23 "2013-04-25T14:28:16Z")
A few things about Apple. 1. They currently have no debt. 2. A lot of their cash is overseas and if they brought it into the US they will have to pay US tax as US taxes are higher than lots of countries. 3. Apple just announced that they are going to have a special dividend and they are going to expand their stock buyback program. To do these two things they are going to borrow money for the first time in a long time (perhaps the first time period I am not sure) ---
**Author:** ![FE3O4ENAIL](https://avatars.discourse-cdn.com/v4/letter/f/ba9def/32.png) [@FE3O4ENAIL](https://boards.straightdope.com/u/FE3O4ENAIL)\ **Post date:** [April 25, 2013, 2:33pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/24 "2013-04-25T14:33:34Z")
Corporate debt has costs associated with the loans. Those costs are spread out over the life of the loan. If you pay off the debt, you must write off those costs in the current period. Less money to go to the bottom line. ---
**Author:** ![Hermitian](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/hermitian/32/470_2.png) [@Hermitian](https://boards.straightdope.com/u/Hermitian)\ **Post date:** [April 25, 2013, 2:54pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/25 "2013-04-25T14:54:24Z")
> [@friedo](#): > > How about an index fund. Average rate of return on the S&P 500 over the past 10 years is around 7.8% (including dividend reinvestment.) I didn’t think things such as stocks to be cash-equivalent, since they have a track record of taking plunges in value. ---
**Author:** ![jbaker](https://avatars.discourse-cdn.com/v4/letter/j/59ef9b/32.png) [@jbaker](https://boards.straightdope.com/u/jbaker)\ **Post date:** [April 26, 2013, 8:22pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/26 "2013-04-26T20:22:06Z")
While there are often good reasons, some of them mentioned above, for a company to have both cash and debt, Apple’s situation is a little different. Its current liabilities consist of accounts payable, accrued expenses, and deferred revenue. Its noncurrent liabilities are mainly deferred tax liabilities. These are not things where it would be practical or desirable for Apple simply to pay them off to get rid of them. If you want to see for yourself, Apple’s most recent quarterly report is at [http://files.shareholder.com/downloads/AAPL/2446096033x0x656152/cd6a3789-1507-4496-9361-be5b7c26f221/Q2\_2013\_Form\_10-Q\_AS-FILED.pdf](http://files.shareholder.com/downloads/AAPL/2446096033x0x656152/cd6a3789-1507-4496-9361-be5b7c26f221/Q2_2013_Form_10-Q_AS-FILED.pdf). The balance sheet is on page 4, and there is additional details on liabilities on page 13, in the notes to the financial statements. ---
**Author:** ![TimeWinder](https://avatars.discourse-cdn.com/v4/letter/t/bcef8e/32.png) [@TimeWinder](https://boards.straightdope.com/u/TimeWinder)\ **Post date:** [April 26, 2013, 8:26pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/27 "2013-04-26T20:26:43Z")
> [@Hermitian](#): > > I didn’t think things such as stocks to be cash-equivalent, since they have a track record of taking plunges in value. See, for example, AAPL. :smack: ---
**Author:** ![Qwakkeddup](https://avatars.discourse-cdn.com/v4/letter/q/90ced4/32.png) [@Qwakkeddup](https://boards.straightdope.com/u/Qwakkeddup)\ **Post date:** [April 26, 2013, 11:38pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/28 "2013-04-26T23:38:43Z")
> [@Omar\_Little](#): > > Maybe you should do some basic research before commenting: [Equity (finance) - Wikipedia](http://en.wikipedia.org/wiki/Stockholder%27s_equity) Sorry, it was actually suppose to be in the form of a question. I was really tired when I wrote that and it kinda came out wrong. That is my story and I am sticking to it? 🙂 ---
**Author:** ![CookingWithGas](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cookingwithgas/32/485_2.png) [@CookingWithGas](https://boards.straightdope.com/u/CookingWithGas)\ **Post date:** [April 27, 2013, 1:55am UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/29 "2013-04-27T01:55:39Z")
> [@gazpacho](#): > > A few things about Apple. > > 1. They currently have no debt. > 2. A lot of their cash is overseas and if they brought it into the US they will have to pay US tax as US taxes are higher than lots of countries. > 3. Apple just announced that they are going to have a special dividend and they are going to expand their stock buyback program. To do these two things they are going to borrow money for the first time in a long time (perhaps the first time period I am not sure) Good item in [today’s Washington Post](http://www.washingtonpost.com/business/economy/what-apples-stock-buyback-shows-about-corporate-tax-games/2013/04/25/bcd6dc9a-adea-11e2-8bf6-e70cb6ae066e_story.html) explaining this situation. Apple is going to borrow money for the stock buyback in spite of how much cash they have. ---
**Author:** ![newcomer](https://avatars.discourse-cdn.com/v4/letter/n/e5b9ba/32.png) [@newcomer](https://boards.straightdope.com/u/newcomer)\ **Post date:** [April 27, 2013, 2:54am UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/30 "2013-04-27T02:54:48Z")
> [@jbaker](#): > > If you want to see for yourself, Apple’s most recent quarterly report is at [http://files.shareholder.com/downloads/AAPL/2446096033x0x656152/cd6a3789-1507-4496-9361-be5b7c26f221/Q2\_2013\_Form\_10-Q\_AS-FILED.pdf](http://files.shareholder.com/downloads/AAPL/2446096033x0x656152/cd6a3789-1507-4496-9361-be5b7c26f221/Q2_2013_Form_10-Q_AS-FILED.pdf). The balance sheet is on page 4, and there is additional details on liabilities on page 13, in the notes to the financial statements. That’s one good looking balance sheet. The most interesting line - $115 billion of retained earnings. ---
**Author:** ![CookingWithGas](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cookingwithgas/32/485_2.png) [@CookingWithGas](https://boards.straightdope.com/u/CookingWithGas)\ **Post date:** [April 27, 2013, 12:22pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/31 "2013-04-27T12:22:55Z")
> [@newcomer](#): > > That’s one good looking balance sheet. Corporate finance porn 😃 ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [April 27, 2013, 3:35pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/32 "2013-04-27T15:35:19Z")
> [@Hermitian](#): > > That was the part I don’t understand as I mentioned in my OP. I don’t know what kind of cash-equivalent investments can be made that make better returns than most loans. If they are out there, someone please tell me what they are. I bought Merck when it was paying 8% in dividends. Its down to paying something near 3.8% now. I get a tax write off on the mortgage (and corporations do on interest), so even with my 4% mortgage, I’m still coming out ahead on Merck because of the growth. (I own a bunch of other stock as well, Merck has been one of my darlings because its done so well in both dividend growth and gain). Is there risk? Sure. But its risk I can afford to take. If the stock market drops by half, I could still pay off my mortgage (Other decent bets - AT&T pays a 5%+ dividend, Verizon is almost 5%. Utilities and energy stocks tend to be good, as do pharmaceuticals. They all provide needs, tend to pay good dividends, and don’t see a whole lot of volatility. But when playing the market, you do need to be able to afford the risk. People who have amassed enough cash to pay off their mortgage while maintaining their mortgage tend to be good bets for being able to afford the risk. In general, well known corporations tend to be pretty good bets for affording the risk, too, but when looking at them, you want to see that the majority of their cash flow is from operations, not investments, If they are using their investments to cover up a bad business, that isn’t a good long term strategy). ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [April 27, 2013, 4:04pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/33 "2013-04-27T16:04:52Z")
> [@CookingWithGas](#): > > Corporate finance porn 😃 Berkshire Hathaway is a lot of fun - Buffett’s letter to sharesholders each year is worth a year of business school: [http://www.berkshirehathaway.com/](http://www.berkshirehathaway.com/) (Warning, this is the unsexiest corporate website in existence) ---
**Author:** ![Dangerosa](https://avatars.discourse-cdn.com/v4/letter/d/22d042/32.png) [@Dangerosa](https://boards.straightdope.com/u/Dangerosa)\ **Post date:** [April 27, 2013, 4:08pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/34 "2013-04-27T16:08:40Z")
> [@Hermitian](#): > > I didn’t think things such as stocks to be cash-equivalent, since they have a track record of taking plunges in value. GAAP agrees with you. You don’t put those things under “cash or cash equivalents” on a balance sheet. But generally speaking, you want your "cash and cash equivalents not to be a huge deal larger than your “current liabilities” because you want the money working for you - cash equivalents don’t. ---
**Author:** ![Baron\_Greenback](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/baron_greenback/32/48_2.png) [@Baron\_Greenback](https://boards.straightdope.com/u/Baron_Greenback)\ **Post date:** [April 27, 2013, 4:25pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/35 "2013-04-27T16:25:16Z")
> [@Dangerosa](#): > > I bought Merck when it was paying 8% in dividends. Its down to paying something near 3.8% now. I get a tax write off on the mortgage (and corporations do on interest), so even with my 4% mortgage, I’m still coming out ahead on Merck because of the growth. (I own a bunch of other stock as well, Merck has been one of my darlings because its done so well in both dividend growth and gain). > > Is there risk? Sure. But its risk I can afford to take. If the stock market drops by half, I could still pay off my mortgage > > (Other decent bets - AT&T pays a 5%+ dividend, Verizon is almost 5%. Utilities and energy stocks tend to be good, as do pharmaceuticals. They all provide needs, tend to pay good dividends, and don’t see a whole lot of volatility. But when playing the market, you do need to be able to afford the risk. People who have amassed enough cash to pay off their mortgage while maintaining their mortgage tend to be good bets for being able to afford the risk. In general, well known corporations tend to be pretty good bets for affording the risk, too, but when looking at them, you want to see that the majority of their cash flow is from operations, not investments, If they are using their investments to cover up a bad business, that isn’t a good long term strategy). Just look at Berkshire Hathaway’s investment strategy. There’s never going to be a major drop in demand for shaving products after all. That’s a longer term bet, but that’s what big funds do. ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 27, 2013, 6:42pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/36 "2013-04-27T18:42:42Z")
> [@CookingWithGas](#): > > Good item in [today’s Washington Post](http://www.washingtonpost.com/business/economy/what-apples-stock-buyback-shows-about-corporate-tax-games/2013/04/25/bcd6dc9a-adea-11e2-8bf6-e70cb6ae066e_story.html) explaining this situation. Apple is going to borrow money for the stock buyback in spite of how much cash they have. Yup. Since from AAPL’s point of view, their stock is undervalued, they are going to buy it back at bargain basement prices PLUS, and sweet Jesus you gotta love this part, deduct the interest expense incurred on the money they’re using to do it. I LOVE THIS FUCKING COUNTRY!!! 😉 But wait, there’s more. Since every share pays a dividend of $12.20, that’s offsetting the interest payments. And since this means they never have to repatriate any of the money they have squirreled away overseas to use for buying back stock . . . KACHING! That’s right. They’re saving even more. [Here’s an good article on strategy.](http://www.washingtonpost.com/business/economy/what-apples-stock-buyback-shows-about-corporate-tax-games/2013/04/25/bcd6dc9a-adea-11e2-8bf6-e70cb6ae066e_story.html) But AAPL is, for the most part a special case. The main reason for the behavior referenced by the OP is that no one trusts the financial system any more. I can’t believe no one has gotten this out of 35 posts. It’s only been 6 years since our near-financial-death experience folks. It’s not that long ago that banks were afraid to loan even to other banks - even overnight for Christ’s sake. For a while in 2008, the financial system ceased to function in any meaningful way. Your ATM still worked, there were no bank runs. But at higher levels of the system, it was utter chaos. People like CEO’s, CFO’s or those who would be moving into such position DO remember what happened and it scares the fucking shit out them. Even with the improving economy, no one wants to rely solely and maybe in a lot of cases even primarily on credit availability. HOWEVER, that will soon change. Everyone understands that interest rates will eventually have to go up. The fed will need to reduce it’s balance sheet to the tune of around $2T which means sucking that much out of the economy. It won’t happen for years most likely unless economic growth accelerates and stimulates inflation fears, but everyone knows that sooner or later, it’s a done deal. As a result, execs with a few neurons to rub together and the prospect of having projects with decent ROI’s will act soon to float debt issues and lock in the current low rates - even if they won’t need the money immediately. The worst thing that happens is that when rates go up, they buy every back at a discount. Either way they can’t lose. ---
**Author:** ![Dewey\_Finn](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/dewey_finn/32/4222_2.png) [@Dewey\_Finn](https://boards.straightdope.com/u/Dewey_Finn)\ **Post date:** [April 27, 2013, 6:58pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/37 "2013-04-27T18:58:35Z")
> [@Baron\_Greenback](#): > > Just look at Berkshire Hathaway’s investment strategy. There’s never going to be a major drop in demand for shaving products after all. That’s a longer term bet, but that’s what big funds do. What does the demand for shaving products have to do with Berkshire Hathaway? ---
**Author:** ![deltasigma](https://avatars.discourse-cdn.com/v4/letter/d/e5b9ba/32.png) [@deltasigma](https://boards.straightdope.com/u/deltasigma)\ **Post date:** [April 27, 2013, 7:42pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/38 "2013-04-27T19:42:15Z")
\*\*CookingWithGas: Pls forgive me for being completely brain dead and citing your cite as my cite without just instead referring to your cite. I’m issuing myself a citation and proceeding to lockup. ☹ \*\* ---
**Author:** ![CookingWithGas](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cookingwithgas/32/485_2.png) [@CookingWithGas](https://boards.straightdope.com/u/CookingWithGas)\ **Post date:** [April 27, 2013, 10:31pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/39 "2013-04-27T22:31:17Z")
> [@deltasigma](#): > > \*\*CookingWithGas: Pls forgive me for being completely brain dead and citing your cite as my cite without just instead referring to your cite. I’m issuing myself a citation and proceeding to lockup. ☹ > \*\* No harm done 🙂 I knew about that article because I read it in the paper version that day. I still read paper; apparently I am a dying breed. ---
**Author:** ![Baron\_Greenback](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/baron_greenback/32/48_2.png) [@Baron\_Greenback](https://boards.straightdope.com/u/Baron_Greenback)\ **Post date:** [April 28, 2013, 1:05pm UTC](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618/40 "2013-04-28T13:05:00Z")
> [@Dewey\_Finn](#): > > What does the demand for shaving products have to do with Berkshire Hathaway? Gillette? Unless they’ve sold that holding of course. [Previous page](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618.md?page=1) [Next page](https://boards.straightdope.com/t/corporations-that-have-large-amounts-of-cash-why-dont-they-reduce-their-debts/656618.md?page=3)