Opinion

Felix Salmon

Apple’s sensible dividend

By Felix Salmon
March 19, 2012

Historically I haven’t been a fan of people saying that Apple should start paying dividends. I didn’t like it when Jon Fortt pushed it in 2007, and I didn’t like it when Arik Hesseldahl had the same idea in 2008. (Although by that point I did concede that “a modest dividend, tied to profits, makes perfect sense”.) Fast forward to 2012, however, and I think that Apple’s announcement is a perfectly sensible one, and if anything overdue.

The problem with most people asking for dividends and stock buybacks is that they generally have a pretty stupid argument, along the general lines of “If X declared a dividend, its stock would go up. Stocks going up are a good thing. Therefore, X should declare a dividend.”

That argument doesn’t even make much sense: if cash leaves the company and goes straight into shareholders’ pockets, the value of what’s left behind goes down, not up. If a company gives a bunch of money back to shareholders and its value goes up as a result, then it has much bigger problems than not paying dividends.

Apple’s stated reason to start paying dividends is simple: it has more money than it knows what to do with. Fortress balance sheets and strategic flexibility are all well and good, but there comes a point — around $100 billion, it would seem — at which you can buy anything you could conceivably desire, and still have more than enough money left over. So if Apple can’t use that money, give it back to shareholders, who surely can.

The stated reason for Apple’s stock buybacks makes perfect sense too. A large part of Apple employees’ compensation comes in the form of equity in general, and restricted stock units in particular. When those RSUs vest, all other shareholders get diluted. So to prevent that from happening, Apple’s going to buy back roughly as much stock as it’s issuing.

Now the kind of people who look at Apple as a stock first and as a company second are not going to be happy about this. And weirdly, leading that charge today is the Wall Street Journal, and its Marketplace editor Dennis Berman. Shortly after Apple’s dividend was announced, the flagship @WSJ Twitter account, with more than 1.5 million followers, told them all that “Apple’s cash pile exceeds the GDP of more than two-thirds of the world’s countries.” That’s a classic case of comparing apples with oranges: the cash pile is stock, while GDP is flow. And it’s exactly the kind of unhelpful and misleading statistic that the WSJ should be trying very hard to avoid.

Shortly afterwards, the same @WSJ account retweeted SmartMoney:

Apple’s dividend looks so stingy, writes @jackhough, that the company belongs on “Hoarders.” http://t.co/2cgCC931
Mar 19 via TweetDeck Favorite Retweet Reply

And the griping didn’t stop there.

Apple’s 1.81% dividend yield is hardly exceptional. A comparison: AT&T: 5.61%, Verizon 5.09%, MSFT 2.42%, HP 2.01% http://t.co/JHBfcGDs
Mar 19 via TweetDeck Favorite Retweet Reply

It’s almost as if the WSJ doesn’t understand that Apple’s dividend yield is not under its control. Apple can set the level of its dividend; it can’t set the level of its share price. Is the WSJ really implying that Apple should wish for a lower share price, so that its dividend yield goes up? After all, at $10.60 per year, Apple’s dividend is fully 3% of where its stock was trading as recently as November. What’s more, at $9.9 billion per year, Apple’s dividend is very close to being the highest in the world. Here’s the league table, as of Friday:

Company Annual dividend
(billion US$)
AT&T 10.17
Telefonica 9.97
Exxon Mobil 9.02
Vale 9.00
PetroChina 8.41
Vodafone 7.08
Royal Dutch Shell 6.88
Total 6.77
General Electric 6.46
Pfizer 6.23
Johnson & Johnson 6.16
Chevron 6.14
Procter & Gamble 5.77
HSBC 5.59
Verizon 5.56

If you look down this list, it’s not really the kind of company that Apple particularly wants to keep. AT&T is returning more than $10 billion a year to its shareholders; I’m sure that all of us who use its service could think of a few areas that money could easily be put to good use. And five of the top eight companies on this list are in the commodities business; the other three are telecoms. Not a single company on the list could realistically be considered a growth stock or a hotbed of innovation.

But the people who prefer financial engineering to, well, real engineering are never going to be happy with Apple’s conservatism. Dennis Berman made his own Cracker Barrel barb, and then followed up with this:

berman.tiff

There is no reason for Apple to issue debt: companies issue debt when they can invest it and get a good return on their investment. But as we’ve seen from Apple’s cash pile, Apple has essentially nothing to invest in at all. So long as there’s a cash pile, issuing debt would only make that pile go up, rather than down, while forcing the company to pay interest for no good reason. Having a cash pile and issuing debt is a bit like having a CD and running a balance on your credit card: idiotic.

And Berman’s wrong if he really thinks that Apple could issue debt cheaper than the US government. Companies which can borrow more cheaply than the US government are a bit like those faster-than-the-speed-of-light subatomic particles: if you look more closely, they turn out not to exist after all. The US Treasury can borrow more cheaply than anybody else just because the US Treasury market is much more liquid than the market in any other fixed-income name. Which in turn is a function of the fact that there are $11 trillion of Treasury bonds outstanding. I think we can safely say that Apple’s never going to borrow anything near that much money.

Now Apple could, if it wanted, declare a monster special dividend, get rid of all its cash, borrow lots of money, use that money to buy back stock, and generally lever up in the name of financial engineering. That would be rather worrisome, I think, to the vast majority of Apple’s shareholders — and it would certainly be worrisome to any potential buyers of Apple’s bonds. Basically, Apple has two choices when it comes to debt. It can issue debt while it’s already sitting on lots of cash, which is redundant and stupid. Or it can get rid of all its cash before it issues debt, in which case it could no longer borrow at ultra-cheap rates, and it would lose a lot of strategic flexibility at the same time.

So well done to Tim Cook for announcing a sensible dividend at a sensible time, when Apple’s throwing off enormous amounts of cash and there’s nothing obvious to spend the money on. And well done too for ignoring the noise coming from the financial media, who think that his company is simply a stock price. It isn’t, and I sincerely hope Apple never ends up that way.

Comments
34 comments so far | RSS Comments RSS

“I’m sure that all of us who use its service could think of a few areas that money could easily be put to good use.”

Profitably? Sure, they could improve service. But could they convince customers to pay more for that improve service? Convince them to pay ENOUGH more for the improved service to make up for the cost of the investment?

If I were running AT&T, Verizon, or Telefonica, I would be milking those mobile profits as rapidly as possible. Prices and profits will come down in wireless, just as they’ve done for landlines. Bet Apple profits more from the wireless boom than all three combined.

Posted by TFF | Report as abusive
 

I get the dividend, it makes sense. What I fail to see is the logic in instituting a stock buy-back on a company trading at over six times book and up 50% ytd

Posted by Sechel | Report as abusive
 

I must be missing something…is there a point to using November’s stock price, as opposed to today’s, to derive percentage of dividend to stock price?

Posted by GRRR | Report as abusive
 

Good article.

My view is that there is an agenda behind the calls for Apple to shrink its cash pile. Whether this comes from competitors and those who make more money if Apple fails, or from financial people looking to make money off of Apple’s cash pile I couldn’t say. But since Apple has already been an inch from bankruptcy in its history, and the world of tech is so fickle, I am not so pleased that Apple have succumbed to the call to release cash.

Posted by FifthDecade | Report as abusive
 

I’m getting to feel a little too sycophantic. The choice here was agree with Salmon’s call on a subject yet again or comment nothing. The article is too good not to comment, so here we are. Even the word “sensible” in the title got me nodding before I opened the RSS. Hey Salmon, do me a favour, write some guff about vulture funds and Argentina again, give us a chance to bicker a bit occasionally.

Posted by ottorock | Report as abusive
 

@TFF, ATT and Verizon ARE milking those mobile profits as rapidly as possible. They have great margins, and exploit their government-granted semi-monopolies and immunity to anti-bundling laws very well.

And I agree that Apple will profit more from the wireless boom than those 3 carriers combined.

I used to think they should pay a higher dividend than 1.8%, but as it has been highlighted, more than 2/3 of their cash is overseas and subject to taxes should they bring it home. I would be in favor of an exclusion to the tax on repatriated profits that are distributed to shareholders (assuming the dividends are taxed as ordinary income). If they could bring home $20 billion in cash sitting overseas without paying taxes on it, they might have reason to issue a one-time dividend of $20.

In the meantime, the cash will just sit there, earning next to nothing and doing nothing. Might as well be in a safe deposit box.

Posted by KenG_CA | Report as abusive
 

GRRR: His point is that there’s no especially good point to using today’s price rather than November’s. Stock price bounces around; dividend yield will bounce around inversely, unless the board has way, way too much time on its hands.

I do think that dilution isn’t per se a particularly good reason to buy back shares. The assessment as to whether to return that money as a bigger dividend or to buy back more shares (or to throw it in a pile and roll around naked in it) should be justified in other terms.

I find it interesting that the top 3 are now phone companies.

Posted by dWj | Report as abusive
 

@GRRR: Felix’s statement conveys information, in addition to data. The point is that for a share with a broad price range over a short time period, it makes no sense to talk about about what the dividend yield is at this very second. Maybe a dividend yield based on the average stock price over the last quarter would be a better representation of the equity yield over that time period.

If GRRR wanted to talk about historical dividend yields of particular volatile stocks, how would you select the stock price to use as the denominator? Perhaps say they spun off $X in dividends during 199x, when their stock price averaged (or VWAPed) $Y over that year. Or would you use the 12/31/9x stock price?

Posted by SteveHamlin | Report as abusive
 

I don’t understand the motivation for the stock buyback either. Was just commenting about that on Felix’s prior post http://blogs.reuters.com/felix-salmon/20 12/03/19/did-the-market-know-about-apple s-announcement/#comment-37077

Stated reason was that Apple employees’ compensation is paid out as restricted stock on a vesting time line, and consequent dilution effect on other shareholders (thus the buyback to prevent that, per Felix’s explanation). But this isn’t anything new! Apple has been compensating employees in similar manner for at least a decade. Yet I couldn’t find any recent, or even periodic history of share repurchases. But I didn’t look too carefully, just skimmed shareholder announcements.

Why do the share buyback now, why is it necessary whereas it wasn’t in the past?

(Felix: You are VERY prolific. Reuters is probably getting their money’s worth out of you as an employee!)

Posted by EllieK | Report as abusive
 

“There is no reason for Apple to issue debt: companies issue debt when they can invest it and get a good return on their investment… So long as there’s a cash pile, issuing debt would only make that pile go up, rather than down, while forcing the company to pay interest for no good reason.”

How about the fact that interest payments are tax deductible? Apple could borrow billions at very low cost, distribute it all to the shareholders using a large repurchase or a one-time special dividend, and as a result save their shareholders a boat-load of money in lower taxes.

Posted by determinista | Report as abusive
 

determinista, yes, interest payments are tax deductible. But the answer to your larger question is that Apple is in the business of designing and building electronic products, not doing financial regulatory and tax arbitrage.

If you want that service, there are all kinds of firms in the Cayman Islands and elsewhere who will be glad to assist you.

Posted by Strych09 | Report as abusive
 

determinista,
The tax advantaged nature of interest payments is one of the reasons why corporate theorists think Apple should issue debt and pay a dividend now. Other arguements for Apple to issue some debt and pay a huge dividend now is the time value of money stipulates that a dollar of dividend now is more valuable to me the shareholder than a dollar of dividend 10 years from now, especially given that the discount rate used to discount stock value is much higher than Apple is earning on the cash. Another factor is the limited liability shield. Apple may be more comfortable holding that cash, but if their business every gets into real trouble, I would rather have that dividend be sitting in my bank account and have some bondholders sharing the loss with me than see how long it would take Apple to burn through their bank account. Not saying that these theories are right, but some of the reasons that companies with low cash balances and debt can be seen as more efficient.

Reasons companies with low cash / higher debt are less efficient:

Can’t finance all attractive investment opportunities – although obviously not a problem for apple, they could R&D 50 more iPads with the cash they have (and don’t have 50 iPad quality ideas).

Cost of financial distress – more likely to go bankrupt and this cost is built into the cost of their debt.

Posted by TurtleBay | Report as abusive
 

I see it as a defensive move. Apple has a good cash flow and $100B cash on hand. Their stock valuation is about $500B which suggests that you could take control of the company for maybe $300B, so interest would run about $12B a year to be paid out of company cash flow. You could probably get this number down well under $10B if you pull the proper shenanigans with someone who has access to the Federal Reserve window. You take over, muck with the stock to neutralize the minority shareholders, then you liquidate the company.

There is a HUGE savings gut with all kinds of money sloshing around with no real investment opportunities, so this would be an easy sell. General return on investment collapsed along with wage growth, its primary driver. Mitt Romney made big bucks doing this kind of thing at Bain, and while it would be a shame to destroy Apple, there is a lot of money to be made.

I think Apple executives have realized this and recognize that they need a defensive posture. Lowering the cash buffer and cutting the number of shares outstanding would make them a less attractive target. (I think when Steve Jobs was alive, he could have fought such a takeover by threatening to quit. The rapid collapse in stock price and valuation would have made the looting a lot less profitable.)

I know this is a cynical take, but it’s all about the numbers.

Posted by spiffy76 | Report as abusive
 

I still haven’t gotten a satisfactory answer to using November’s price. If the point is that prices fluctuate, November is NO LESS arbitrary than today’s closing.

And anyway, when it comes to comparison of other stocks, the dividend yield would be based on the day that the dividend was awarded, not based on the price of the stock five months earlier to skew the numbers.

I guess that’s the point isn’t it: a bit of obfuscation. Otherwise VZ’s high yield dividend would compare extremely favorably to Apple’s, making Apple look downright stingy.

And HSBC, with the same beta as Apple, is also providing a much higher dividend yield compared to Apple.

Posted by GRRR | Report as abusive
 

Wow, I don’t where to begin regarding my issues with this post.

It ignores the owner vs. agent (management) concern inherent to any large public company with dispersed ownership – “If a company gives a bunch of money back to shareholders and its value goes up as a result, then it has much bigger problems than not paying dividends” – no, not if shareholders fear that the company is holding more cash than it can deploy profitably and that management may use cash on ill-conceived empire building or vanity projects. Microsoft did exactly that, and Google appears to be headed down the same road.

It completely ignores innovation occurring in areas outside of the tech industry, narrowly defined – “not a single company on the list could realistically be considered a … hotbed of innovation” ignores all sorts of achievements by GE (developing better jet engines, medical imaging, etc.) and supermajor oil companies like ExxonMobil and Chevron (finding and producing oil and gas in increasingly challenging environments, geologies, and depths).

It never looks at Apple’s dividend according to the most meaningful ratio – payout ratio of dividends as a percent of net income or free cash flow.

It completely discounts the notion that a business should be financed with a mix of debt and equity, especially when (as with Apple) it generated $16.2 billion in free cash flow (cash from operations less cap ex) in the last quarter (think about that – Apple more than funded its annual dividend in the last quarter). Apple would be able to borrow at a very low rate even if it had no cash on its balance sheet – though it might be better off using domestic borrowing to finance a special dividend/share buyback while waiting to see if a tax holiday allows it to repatriate cash at a more opportune time.

Apple says it’s going to spend $45 billion over 3 years on dividends and share buybacks. Unless it’s business tanks dramatically from where it has been the last 18 months, Apple’s cash pile will keep growing. There is no reason for a company to sit on anything close to $100 billion of cash, which is, after all, ultimately money that doesn’t belong to the Board or Tim Cook, but to Apple’s shareholders.

Posted by realist50 | Report as abusive
 

The Treasury can borrow at a lower rate than any other issuer of USD denominated debt because the Treasury can print dollars to service its obligations. Apple cannot. Liquidity is at best a second order influence.

Posted by johnhhaskell | Report as abusive
 

@KenG, check out the capex of the wireless companies. They would have trouble sustaining those dividends if not borrowing heavily.

What happens as the data demands of smartphones become more expensive to feed, price competition ramps up, and the ever-changing technology demands revamping your network every three years? Despite those operating margins, I don’t think they are great businesses.

Posted by TFF | Report as abusive
 

As for the dividend and the stock repurchasing, I think Apple made the right move. Where their plan to return equity to the stockholders falls short is that with their share price is so lofty, it will take forever for your average stockholder to end up with a single full share of stock, should they decide to reinvest their dividend back into AAPL. For that sake, and that sake alone, they should have announced a 10 for 1 stock split at the same time that they announced the dividend and the stock buyback.

Posted by GaryOh | Report as abusive
 

TFF, they shouldn’t be issuing those dividends. They are, as you point out, subject to the rapidly changing technology, which makes them a technology stock. If you separate the wireless from the wireline, you have a tech growth company, all of which (except for Apple) cannot and do not pay dividends, because they need to re-invest until the evolutionary pace of their underlying technology slows down. But their management doesn’t know or care about this, and manages the companies to maximize their personal compensation.

They are great businesses now, as they are growing fast, and fast growth hides lots of management sins.

Posted by KenG_CA | Report as abusive
 

KenG, I disagree. The wireless giants are in a bad situation. Their present income is barely enough to keep pace with continually replacing their technology, and I expect per-user revenues to come *down* over the next few years while bandwidth demands go *up*.

Very high fixed costs to build out a network, costs that must be recouped within 3-5 years before the technology is out of date. Low marginal costs for adding a new customer. (At most you need to split some high-activity cells.)

Moreover, there is no brand loyalty. People hate the telecoms for poor service and byzantine billing practices. They have to compete on price and service quality, both of which have negative implications for the bottom line.

Verizon’s CapEx is running $16B-$17B a year, against net income that has been less than half that. Sure, the CapEx is matched against depreciation, but they are investing very heavily in their network — and much of that will be outdated and worthless in five years. Much the same situation for AT&T, though with a little more debt on the books.

Growth companies? Sure, I expect that wireless usage will grow. But will profits grow? Networks are a natural monopoly, and we have too much competition in the markets right now. AT&T buying T-mobile would have been a step in that direction, but you saw how THAT went.

Posted by TFF | Report as abusive
 

TFF, the wireless duopoly has only themselves to blame. Their income is enough to cover their capex (if net income i half of annual capex, and their capital equipment lasts 4 years on average (only a small percentage of that capital equipment is obsoleted in 4 years), then their income = 2x their capex.

They encourage the obsolescence of technology by bundling equipment and service – this masks the true cost of the equipment, and gives customers incentives to upgrade phones every two year (they still charge for the subsidy after it’s been paid off by the subscriber). That also allows equipment prices to stay high – margins on smart phones are probably double that of PCs, mostly because of the lack of true price competition. A state-of-the-art smartphone sells for over $600, and there’s no reason so many people in this country should be devoting so much of their money to one every two years, but they do, because they think it’s only $100 or less. The carriers are accelerating the rate of technology advancement.

I strongly disagree with you on the T-Mobile deal – that would have been horrible for competition. T-Mo is the lowest priced carrier, and offers far better service than ATT. They were the only carrier offering unbundled service, where you could pay less per month if you brought your own phone. The ATT deal was a naked attempt at eliminating an obstacle to higher fees. We don’t have too much competition, the problem is that too much of the market is controlled by two dominant companies, and that inhibits true competition.

If wireless industry profits don’t grow, it will only be because of the carriers inept management.

Posted by KenG_CA | Report as abusive
 

KenG, you are confusing flows and stock. The capex is the annual expenditure on new equipment, NOT the total capital stock. Would you like me to dig into this in greater detail? My guess is that the capex represents half or more of their cash flow, and has for years, despite revenues that are showing only modest growth.

I also suspect that some of Verizon’s repeated “one time” writeoffs over the past few years have resulted from premature obsolescence of equipment. I have a very hard time reading explanations of writeoffs, though. Are they intentionally obscure?

Agreed that the marketing practices feed into the technology cycle, but this is precisely the dynamic that makes wireless carriers poor investments. They will throw a $600 phone at a customer, which will consume another $1000 of network upgrades, in the hope that they will begin to make a profit after the two-year contract is up. Except two years later, they (or another carrier) throws ANOTHER $600 phone and $1000 of network upgrades at that customer. This is terrific for Apple (and I expect them to profit more from wireless than all the carriers combined). This is a very bad dynamic for the carriers.

I must not have been clear in my mention of T-Mobile. Of *course* the acquisition would have squelched competition. Might have rapidly driven Sprint out of the business as well, leaving just the big two.

A monopoly or duopoly can be profitable in this kind of a business. But with four legitimate national carriers (use T-Mobile myself — honest pricing!), all will be challenged to turn a steady profit.

We have too much competition for the market to be profitable for the companies. Too little for the good of the consumer.

Posted by TFF | Report as abusive
 

TFF, no I was taking your annual capex of $16B a year, and comparing it to their annual profit of about half that, or $8B a year. If the capital equipment lasts 4 years, it is costing them $4B/yr – if they have to spend money beyond that, then I assume they are expecting it will generate additional profits, and not have to do that to maintain their current level of service.

If they spend $16B this year, that should be enough for all their current customer needs. Do they need to spend another $16B next year, just to keep those customers happy? I don’t think so, and if they do, it’s not sustainable, and they definitely shouldn’t be paying dividends. And is that $16B just for wireless service? Or is that for all of their businesses?

I agree with you on the explanation of write-offs – they’re hardly questioned.

I use T-Mo also, and was not thrilled with the prospect of becoming an ex-customer.

I don’t know if there’s too much competition. It seems to work o.k. in other countries. I think having multiple land-line service providers makes no sense, as infrastructure is duplicated, but in wireless service, there is no redundancy of bandwidth, as they all just provide the minimum needed for their subscribers. You will need 2x the bandwidth for 2x the wireless customers, but you don’t need two sets of wires/fibers for 2x the wireline customers. There is enough economies of scale for even the smallest of the national carriers, as long as they know what they’re doing (I think T-Mo’s problems are their horrible marketing, as not enough people realize they offer the best deal, and best customer service, IMO.)

I was really hoping LightSquared would succeed, as it would enable more virtual operators, and then the competition would be reduced to who is the most efficient retailer of service.

Posted by KenG_CA | Report as abusive
 

KenG, that is for all their businesses… And the FIOS rollout is wrapped into that. I’ve looked more closely at TEF, though, which has similar dynamics. Managing a network is simply a capital-intensive activity!

FWIW, the capex approximates the depreciation. Thus their capital supply isn’t really expanding (at least not on a dollar-value basis), it simply costs that much to maintain and upgrade. Not so much “investing for the future” as “running as hard as they can to stay in the same place”.

TMobile offers clearly better deals — which tells me, as an investor, that Verizon and AT&T will have trouble extracting more money from their client base. If prices start to come down, or prices flatten while data demands rise, then they are in trouble.

There is definitely some redundancy of infrastructure when running parallel networks, at least if you desire national coverage in a country as sparsely populated as the US. Europe is far more densely populated, so the dynamics might be different?

Hadn’t heard about LightSquared, but competition kills profits in capital-intensive industries. Look at the airlines. Has there been a single five-year period since deregulation in which there wasn’t at least one major airline going through Chapter 11? Similar dynamics to managing communication networks.

Posted by TFF | Report as abusive
 

TFF and KenG, I view return on equity as a good metric in analyzing a capital-intensive business. Verizon’s trailing ROE is 11.8% – decent but far from exciting. AT&T’s trailing ROE is 3.8%, which is anemic but depressed by the 1-time charges from break-up fees on the T-Mobile deal. The analyst consensus forward EPS implies an ROE of about 14%, which I’d also put in the range of OK but not too exciting.

To compare both of them to a company in a different capital-intensive industry, Union Pacific’s ROE is 18%. Recall that upon purchasing Burlington Northern, Buffett described the railroad business as a good business but not a great business, due to capital requirements. Railroads are also less vulnerable to technology changes than mobile telecom.

Posted by realist50 | Report as abusive
 

TFF, I can’t say for certain, but intuitively, building out a wireless network is much less per subscriber than a wired one. The cells are cheaper than DSL or fiber switches, and you don’t have to dig up trenches or ouse other expensive techniques to get the fiber or copper in the ground. And one cell can support thousands of users, while you need a lot more hardware for thousands of wired users.

LightSquared was going to build an LTE network that they would wholesale out – but it was dependent on using spectrum that supposedly interferes with GPS operations, so their plan is in doubt now. One of their big customers was going to be Sprint, which unfortunately invested in WiMax for 4G, because they didn’t want to wait for LTE (they were essentially punished for trying to accelerate the adoption of technology). Sprint just backed out of that deal, as it doesn’t look like LS is going to make it happen.

realists50, I get your comparison to railroads, but it’s not entirely fair. The railroads in the US refuse to modernize, which is why they run so much slower than they do in other countries. None of them want to invest in new rails, maybe in the other countries, the government subsidizes that, but the U.S. stubbornly insists on only (seriously) subsidizing air and auto travel.

Posted by KenG_CA | Report as abusive
 

KenG – not sure what other countries you are referencing with your rail comment, though I suspect Europe. The freight railroads in the U.S. are probably the foremost freight railroads in the world – your comment sounds like it is focused on passenger rail. I don’t believe that any country in the world uses high speed rail to move freight.

Europe (EU) freight rail moves fewer ton-kilometers than Canada, and a fraction of the U.S. About 70% of EU freight moves by truck, and for the EU trucking share increased (and rail freight decreased) from ’95 – ’06. Rail freight in Europe is rather analogous to passenger rail in the U.S.

http://www.railfreightportal.com/General -Statistics

Posted by realist50 | Report as abusive
 

realist, ROE is a good metric for these purposes, if sensitive to leverage. But my greater concern is about the QUALITY of their earnings. Despite KenG’s critique of freight rail, their assets are DURABLE. Rails, facilities, and engines all have a long useful lifetime.

What is the lifetime of a 3G network? Hasn’t that technology already been pushed to the discount rack, after just five or six years? Technology businesses must necessarily amortize their costs MUCH faster than railways.

Posted by TFF | Report as abusive
 

realist, ok, so I was only using your comment as an opportunity to criticize the obsolete passenger rail system we have in the U.S.. Nevertheless, it’s not a fair comparison, as rail is a much more mature industry than communications, and while its economics are subject to advances in technology, it is at a much slower pace.

TFF, I can’t say what the costs of deploying 3G/4G networks are, but I know how much it costs to add a DSL line – less than six months of revenue. Since DSL only requires incremental capex (i.e., it uses existing wiring), it will cost less than deploying fiber. However, I believe Google has estimated that deploying fiber in suburban markets would cost less than $900 per line – easily paid off in less than three years, if not two (and they are putting their money where their mouth is, in Kansas City).

I know you’re not talking about DSL and fiber, but rather 3G and 4G, but they only have to run wires to one tower for thousands of potential subscribers (and with each new generation of wireless technology, they won’t have to run new wires, if they were smart enough to run fiber there in the first place). I don’t believe adding LTE base stations to existing towers is going to cost all that much.

Posted by KenG_CA | Report as abusive
 

I don’t know the answer either, KenG, which is why I don’t invest in the wireless network managers. If I were to invest, I would want answers to the following questions:

(1) Why is the capex persistently so high?

(2) Is it reasonable to expect that capex will fall off at some point, relative to revenue? (I don’t for a minute believe that the technology cycle is about to halt.)

(3) How the heck do the majors expect to continue charging consumers 50% more than T-Mobile for service that is barely if at all better? (And if their rates drop by a third, those fat dividends will have to go.)

Clearly somebody must see reasons to invest in these companies at these prices. Either they understand the business better than I do or they are fooling themselves with short-sighted earnings estimates and market comparisons. Time will tell.

In any case, I see connectivity as something of a commodity. Doesn’t particularly matter what the nameplate is on the carrier, just the technology in play and the level of investment in building it out. Much better to invest in brands than commodities, especially since I don’t believe in the ability of either Verizon or AT&T to successfully manage a commodity business.

Posted by TFF | Report as abusive
 

Also, KenG, the US isn’t Europe. Very small portions of the country are densely populated — the Northeast Corridor and California. In both of those we have active rail transit, including fairly-high-speed rail service from Boston to Washington DC.

The rest of the country? Rail service isn’t economic. Worse, it is only barely more energy efficient (at typical ridership levels) than medium-haul air travel. Some hints, even, that the latest generation of hybrid and electric vehicles will be MORE energy efficient than mass transit.

Hints at the dilemma here, but isn’t a terribly new idea:

http://www.smartplanet.com/blog/smart-ta kes/without-ridership-public-transit-fai ls-at-energy-efficiency/12623

Ultimately the best way to save energy on travel is to travel less. Whether you choose a car, train, or airplane matters far less than the distances involved.

Posted by TFF | Report as abusive
 

As to why capex is persistently high, ask the shareholders of Olympus. OK, I’m just kidding I’m not suggesting ATT or VZ are doing anything similar to what Olympus did, just that I don’t take anything either of those two companies say at face value. They don’t provide a detailed breakdown, so I can’t challenge it, only question it.

I do believe the capex will slow down, as the rate of technology changes slows down, and they saturate the market. They still are not close to mass adoption of smartphones, so that might take a few years.

Question 3 – People overpay for all kinds of stuff, I don’t see why bad service should be exempt.

I think people invest in those businesses for the dividends, and the potential for growth. I do own shares in many telecoms (including T-Mo’s parent), but they are less ethically challenged than the big two, and in countries that have more potential for growth.

Connectivity is a commodity, but the sellers don’t see it that way, and insist on packaging it with things that people are forced to buy. If the carriers and cable companies had their way, all networks would be walled gardens, where they control the content being distributed over it. I think it’s crazy, especially when it comes to distributing video entertainment, as there is less risk and lower cost in letting third parties sell content over your network, rather than trying to pick winners. I agree that neither VZ nor ATT is the company I would want to manage a commodity, but they know how to use political and economic power to maintain control of the commodity they sell.

I don’t’ think high-speed rail should be universally deployed everywhere in the U.S., but it makes sense for short distances that are now mostly served by air. While I like the idea of traveling across the country in 10 hours on a train, that may be hard to justify, but a 90 minute train ride from LA to SF is not, or between NY and DC.

And you don’t have to sell me on electric vehicles. :-)

Posted by KenG_CA | Report as abusive
 

I’m not familiar with the Olympus story? (Used to own one of their cameras, though. Was nice.)

I would invest in TEF ahead of T or VZ, but their finances are a little scary… Not that familiar with other telecoms.

Posted by TFF | Report as abusive
 

A few months ago, Olympus fired their recently promoted CEO, and said he didn’t fit in with their culture, as he was British. But he claimed it was because he asked uncomfortable questions about where the company had been spending money, and it turns out they were falsifying their accounting, and had lost hundreds of millions of dollars (it might have been billions, but it was a very material amount). For example, they had bought a face cream company for over $700M, and it was worthless. Ultimately, the COB and other execs were fired, and the multiple governments are investigating. The scale of the cover-up was shocking, as it went far beyond expense account fraud.

Most telcos and carriers’ finances are scary, but you have to believe that people will keep their phone service even when the economy tanks. In addition to DT, I also have TEO, which is small but doesn’t seem to have a lot of debt, pays a big dividend (there’s a catch with it, and I don’t know it, but I don’t have a lot invested there).

Posted by KenG_CA | Report as abusive
 

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