Why Apple shouldn’t pay a dividend

By Felix Salmon
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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Firstly, it’s $60 a share not 60 cents.
Secondly, it’s a one-off (special) dividend not a suggestion to become a consistent dividend payer.

Most investors ex out the cash, so their valuation will take into account the cash pile (since different companies have different sizes of cash pile, just like you have different levels of debt, you have to compare like-with-like).

The suggestion that Apple lever up, is however a waste of bytes. Almost no valley/tech company has any debt owing to so many near-death experiences post-tech-bubble.
Very few will ever lever up again, I suspect.

Posted by TinyTim1 | Report as abusive

Wait – I’m confused. Apple doesn’t pay dividends, period? What do they give investors, beyond the fuzzy feelings and liquidation value?

Posted by AnonymousChef | Report as abusive

To be fair to Felix the 60c vs. $60 is Arends’s error, Felix just repeats it.

It will probably be internet fact by tomorrow.

Posted by TinyTim1 | Report as abusive

Cheffy, hardly any fast growing tech companies pay a dividend.
There is a common (and blunt) delineation between growth investments (no dividend) vs. income investments (dividends).

Some companies try to change camp e.g. Ryanair and Freenet, but it is often painful/volatile as you change much of the investor base.

Posted by TinyTim1 | Report as abusive

Like TinyTim said, growth stocks typically pay no dividend, the reasoning being that the company can use the capital to expand and benefit the stockholders through expanded earning that sometime in the future will be paid out as dividends.

Microsoft is another example of a transition from high-growth no-dividend to steady earning dividend-payer (although they still have enormous piles of cash and the dividend is none too large).

Posted by vm5 | Report as abusive

It’s a question of what kind of risk investors want to take. Apple, up to this point, has repeatedly taken technical and strategic risks– the iPhone, the Apple Store, OS X, the switch to Intel CPUs, and so forth. The risk that investors took in buying Apple stock was the possibility that that these ventures would fail. But they succeeded, so the daring investors reaped a significant profit.

It’s the investor’s choice in a free market– you’re free to buy shares in a company that offer a comfortable dividend… or you can take a risk with one that doesn’t.

Posted by MattF | Report as abusive

Why would Apple “spend 2000 to 2005″ porting MacOS X to run on Intel CPUs, when NextStep already ran on Intel CPUs in 1993 (I used it), and Rhapsody ran on Intel CPUs in 1997 (I saw it at Cupertino). Which of the peripheral parts of MacOS X that weren’t in these predecessors does Mr Salmon specifically believe were originally written after 1996 to not be architecture neutral? (Be careful whose programming competence you insult, Mr Salmon!) And how does he believe porting them could be made to fill five whole years?

And, if one believes that paying a dividend is “equivalent to” share buybacks, why immediately go on to claim that, unlike dividends, share buybacks are a poor strategy if a company’s share price is high? Either two things are equivalent or they are not.

Posted by Ian_Kemmish | Report as abusive

VM and Tiny Tim – thanks.

“Not paying dividends now because we have better uses for the money” makes a lot of sense. I was envisioning a company that had no intention to pay dividends in the future.

Posted by AnonymousChef | Report as abusive

Its good Apple Inc. does not play with all the other looser companies we see now a days.

I for one own shares of Apple Inc. but in small quantity but knowing that I can sell my shares now for 3 times my purchase gives me a nice warm feeling.

I like that apple tend to bring out great products that just work.

For Apple Inc. at this time start pushing out the door dividends for no reason and then have to borrow money from banks sound more of a wish for some for Apple to fold.

As a shareholder I at no time have cared about the dividends as I have about stock prices and company performance.

Posted by Kiljoy616 | Report as abusive

Perhaps Apple should do what Microsoft done. Instead of paying out dividends, use its cash hoard to develop products that are worse than the previous one, like Vista. That way its shareholders won’t have to pay that awful 15% tax on dividends. Instead, shareholders can see their dividends wasted as they disappear into the pockets of a bloated, inefficient, overpaid bureaucracy that makes increasingly bad products. Admittedly, Apple has escaped this winners curse so far thanks to the singular vision of Steve Jobs. Let us hope, for many reasons, personal and financial, that his health remains good. Otherwise, Apple can follow the example of most growth companies, which will live and die without ever having paid their long term shareholders a penny. The management, and the employees, however, will have lived well in the meantime.

Posted by maynardGkeynes | Report as abusive

Correction to 7:28: “what Microsoft has done.”

Posted by maynardGkeynes | Report as abusive

…and he’s probably a lousy cook to boot. Ha!

Posted by Uncle_Billy | Report as abusive

You tell’im, Felix!

Apple has been pinned to the ground at several times in its history and each time it has roared back stronger than ever, after pouring its own cash at hand into new technologies.

From Dec 2000 until Dec 2003, eons by stock-trading standards, Apple bounced around $10 per present share, and as little as $6, held afloat only by the cash on its books. Attention Deficit Disorder-riddled investors wouldn’t have thought twice about tossing one of the greatest and most innovative corporations history has produced into the bankruptcy dustheap, if it weren’t for that pesky pile on the balance sheet.

What’s more, it is a shame Arends views writing as a disease! Can any human drive that is not foremost about money possibly be healthy?

Posted by DanHess | Report as abusive

I too have Apple shares, when all around has collasped and fortunes and aspirations dashed they have come through the bad times. At $200+ I’d like to see another ‘split’. If I can’t receive a dividend I can spend on new apple products at least give me the satisfaction of doubling my investment albeit if only in numbers of shares and the option to sell some and update my Apple kit.
Next to Steve I’m the best marketing tool they have.

Posted by Langstraat | Report as abusive

How do you know this is the “top of the market” for Apple stock?

Posted by Philon | Report as abusive

Um, because Apple stock is higher now than it’s ever been in the past?

It doesn’t sound like Brett Arends has made any effort to understand the new tech of blogs and RSS readers.

Nevertheless, his comments on Apple don’t warrant this hyperbole. It’s completely valid to question Apple’s cash stockpile. And as for a cash-financed company borrowing to finance a dividend, that is exactly what Intel did in June, during perhaps its strongest year on record. Hardly a desperate move by a company on its last legs:

http://www.bloomberg.com/apps/news?pid=2 0601103&sid=aPUbuCtDlPpQ

Posted by nedofbaker | Report as abusive

A stock split would be nice. It would make purchasing a small number of shares of stock more affordable to young people who are graduating from college, getting jobs and setting up a 401Ks. They are a new generation of investors who long ago “bought into” the product by spending their allowances on – or asking for gifts of – iPods and iTunes, then MacBooks and iPhones.

….. and it would reward those of us “oldies’ who kept the faith through the years, both in adopting the Mac brand and staying with it, despite the ridicule of friends and colleagues… (Ha!) and purchasing and holding stock for many years. A client I have worked with for 10 years used to tease me about being “a Mac person.” Two years ago, he bought an iPhone and said he’d never go back….. when the family’s PC died earlier this year, he bought his son the promised Desktop Mac. and learned that Apple’s “plug and play” slogan really means what it says.

Posted by Pegford | Report as abusive