Why Apple shouldn’t pay a dividend

January 11, 2010
Brett Arends -- journalist and published author -- is a real thinker, not a blogger.

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Brett Arends — journalist and published author — is a real thinker, not a blogger.

I’ve seen bloggers at work. They sit at their desk and stare at a computer screen for 10 or more hours a day. Tap, tap, tap. Click, click. Tap, tap, tap. Tap. Tap. Double-click…

Is blogging journalism or a nervous tic? I couldn’t do it. I don’t know how anyone can.

I am equally baffled by the readers. Who says “Hmmm, it’s 11 o’clock. I wonder what Felix Salmon has written about Morgan Stanley since breakfast?”

At least writing books involves real research, real thinking and real writing.

Let’s examine, then, what happens when Arends does real thinking, on the subject of Apple’s capital structure and dividend policy. Maybe this blogger could learn a thing or two!

Arends first declares that Apple’s cash hoard is reducing shareholder returns:

Even by conservative estimates the surplus is probably nearing $30 per share.

This is not all money Apple needs to run its business. Most of it is sitting in low-yielding investments like short-term corporate bonds. It’s earning next to nothing.

Apple should therefore start declaring a dividend, says Arends. But that’s not all:

Apple should — gasp — start borrowing, and hand that money back, too. All told, it could probably hand out more than 60 cents or so per share without breaking a sweat…

It could surely borrow, say, $30 billion without any serious risk or problem.

In the current bond market it could get excellent terms, too. Top, AAA-rated companies are paying just 5.5% or so on long term bonds. As Apple earns more than that on its invested capital, borrowing (within reason) would add value.

On the one hand, then, Arends is saying that Apple’s earning nothing on its cash, and so should hand it back to shareholders. Then he adds that Apple should borrow $30 billion at 5.5%, and hand that back to shareholders too — because, and this is where he loses me — “Apple earns more than that on its invested capital”.

But Apple wouldn’t be investing that $30 billion, it would be handing it back to shareholders. What’s more, if Apple could invest $30 billion, it would surely do so with the cash it has on hand — with its opportunity cost of “next to nothing” — rather than borrowing it at 5.5% interest.

What Arends doesn’t mention here is that Apple stock is trading at an all-time high. He also neglects to mention that economically speaking, dividending $30 billion or $60 billion to shareholders is identical to taking that money and spending it on share buybacks. Except that shareholders generally prefer buybacks to dividends, because buybacks don’t end up saddling shareholders with taxable income.

Now if Arends ever read the tap-tap-tapping of bloggers, he’d understand why it’s an idiotic idea for Apple to buy back its own stock at north of $200 a share. I explained as much back in December 2007, and again in February 2008: buybacks mainly benefit short-term speculators. Meanwhile, companies which buy back their own stock at the top of the market are liable to regret it.

In any event, it’s far from obvious that long-term Apple shareholders — none of whom have ever expected a dividend — particularly want Apple to start paying them 60 cents a year in cash. With the stock at $210 per share, that kind of money would barely make a difference to the share price. And that cash still belongs to them: it’s quite literally money in the bank, and if they want to monetize their stock by selling 0.3% of their holdings, they’re more than welcome to do so.

Apple says that it likes having the cash on hand because it gives the company strategic flexibility when it comes to investments and acquisitions. That makes sense. But I think there’s another good reason for Apple to be cash-rich: it allows the company to continue to play the long game, rather than worrying overmuch about quarterly cashflow. To give just one example, Apple spent five years, from 2000 to 2005, writing and developing a version of its operating system, OS X, which would work on Intel chips. It didn’t do that because it wanted or expected to move to an Intel-based architecture, but it felt that the option value was worth it. And then, after five years of capital expenditure with no expectation of any return on that investment, it decided to exercise the option.

In Brett Arends’ ideal world, Apple would lose its cash hoard entirely, and would have to pay for all such projects out of operating earnings. What’s more, it would also have to pay $1.65 billion a year in bond coupons, plus another $540 million in dividends. That’s more than $2 billion a year going out the door, most of which would go to banks rather than shareholders, and none of which would make Apple a better, or more innovative, or more profitable company.

Apple is a fast-growing technology company; the iPhone makes it a major player in the high-capex world of telecommunications. I don’t know what kind of strategic possibilities Steve Jobs and his inner circle are thinking about, but it’s entirely reasonable to assume that at least some of them might involve spending large sums of cash — which doesn’t necessarily mean big acquisitions. So long as Apple’s shareholders evince no desire to start receiving a dividend, I see no reason why Jobs should start paying one.

As for borrowing money in order to return it to shareholders, that’s the kind of desperate move engaged in by companies on their last legs. It’s most decidedly not the kind of thing Apple would, or should, ever do. As Arends would probably realize, were he to engage in some real research and real thinking.


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