Paying dividends is a bad signal. That did not work well for Microsoft's share price. And even though OP argues that Apple will not repeat their fate, the argument is weak. There is only so much more iStuff that you could sell when everyone and their mother has an iPhone.
Paying dividends essentially signals that company does not see how to spend money and has no long-term strategy for growth.
Actually this not reflected in the empirical data. Studies of the data comparing longrun performance of companies with high payout to low payout ratios show significantly that average companies* perform better when they retain less cash.
This is counter-intuitive because a strategist would tell you that companies with more cash have more options, companies with less cash have to go through all the expense of going back to the market every time they need to make capital investments.
One thing that turns out to be the factor is agency costs. Companies with large cash hoards might waste money on bad or frivolous projects or more often bad, overpriced acquisitions.
In apple's case they have more cash than they can reinvest in their own business. The market could get better returns on that cash than apple can. Therefore the market will value the cash on Apple's books at discount to it's true value. The cash is discounted by apple's low sub-market rate of return on that capital and by the implicit risk that management might any day choose to do something dumb with it.
Instead companies that have to go to the market more often to raise cash, that have to file more prospectuses, turn out to be more transparently run and more accountable to shareholders. In the long run managers who "have to open the kimono" more often, turn out to perform better for shareholders.
When Microsoft announced the first huge one time dividend in 2003 or whenever it was, something funny happened. When they transferred X billion dollars to shareholders, their stock should also have dropped by exactly X billion dollars reflecting the value transferred out of the company. Instead their market cap only declined by 0.8X. Meaning than hundreds of millions of dollars of shareholder value was created out of nowhere. This was because the cash was worth that much more to shareholders who had a use for it than in the of microsoft who couldn't do anything with useful with it.
The 0.2X was the implicit discount of the value of that cash on MSFT's books that was unlocked by setting it free.
In fact because dividends are hard to take back, a dividend usual signals to the market that management have confidence in future earnings growth. Stocks usually jump on dividend announcements even though theoretically it shouldn't make a difference. That's the signalling effect.
*the big caveat being that APPL famously never performs or does anything exactly like an average company.
My problem with this, and all other stories on the same theme, is "Why?" Why does Apple NEED to do anything with its cash reserves?
The story says: "Last month Mr Cook admitted that the firm has more cash than it needs for its operations. It’s a nice problem to have. The obvious solution would be to give cash back to shareholders, either via dividends or share buybacks." They claim having more cash than they need as a problem, and then spend 5 paragraphs detailing solutions, without further explaining WHY it's a problem.
Speaking as an (extremely minor) shareholder, I have no desire for dividends or anything else. My AAPL portfolio has gained 100% in 2 years, that's good enough for me.
Why does Apple NEED to do anything with its cash reserves?
Because the board members have a fiduciary duty towards their shareholders. If the company literally has more cash than it knows what to do with, then it is imposing the opportunity cost of that non-use upon its shareholders. Either invest it in something with a high risk/reward potential (and accept the consequences if that investment fails), or return it to shareholders in the form of dividends or a share buyback. If the cash is just sitting in the bank doing nothing then you're paying Apple's management a fat fee for something you could equally well be doing yourself. Large, unused piles of cash are a drag upon the economy.
Because the board members have a fiduciary duty towards their shareholders.
Of course, if the board believes that holding the cash maximizes long-term shareholder value (e.g., by enabling acquisitions or capital expenditures down the road, or serving as a buffer in a recession), holding cash satisfies their fiduciary duty.
> Because the board members have a fiduciary duty towards their shareholders.
Which isn't an issue if the board believes this cash pile is a good tool to maximize long-term shareholder value in the long run, they're in the clear.
> If the company literally has more cash than it knows what to do with
You're deeply misreading Cook's statement. He said Apple does not need its cash reserves for its operations, meaning for day-to-day expenses and management.
That does not even remotely come close to meaning they have more cash than they know what to do with.
Past a certain point, the reasonableness of the board's belief is open to question, and that's what's going on here. The cash pile has been building long enough that some investors and commentators are skeptical about whether Apple has a long-term plan, or is suffering from a lack of imagination.
Because without dividends that gain is entirely speculative. Over the next two years it could triple in value, or it could take a nosedive. There's no fundamentals backing up the value of AAPL shares. Yes, Apple is crazy profitable. But ask yourself: what's in it for the investors if they're not sharing that cash?
Regular dividends provide a fundamental baseline in the value of a stock, and market pressures typically force movement of stock price to normalize the dividend yield. It provides stability for stocks no longer driven by growth and speculation.
AAPL has been a massive growth story for the last decade. But as with any growth story, at some point fundamental limits are reached. I'm not saying that has happened now, but when it does (as it did for Microsoft), Apple will be forced to choose between issuing dividends or watching their share price fall (and, worst case scenario, spiral) as growth speculators sell off their portfolios.
At some point it becomes a liability. The reason is that it can be used to 'take over' Apple. It works like this:
Company has a stock price of $X and lets say a billion outstanding shares. Giving it a 'market cap' of $X * 1e9 or $x billion dollars. It has cash or cash equivalents of $Y billion.
If you try to buy control of the company by buying up all the shares is costs more than $X billion because as you buy shares the price will go up. But you can mitigate that by borrowing up to Y billion dollars that you will 'pay back' by looting the coffers and paying it back.
Now as long as your share price stays high, this is not a huge threat, but there are many, many examples of high tech companies whose share price was very high at one point, and nearly worthless a short while later. Look at Sun as an example $60 -> $1 in the course of about 4 years. So if you price plummets precipitously and you can't 'get rid' of your excess cash, well you end up on some corporate raider's dessert plate.
But corporate raiding aside (while it makes for great drama its not the best reason) the money in 'cash' isn't doing anything for Apple. Its not researching some useful thing, optimizing some operational expense, reducing risk or eliminating barriers to future growth.
Sure having "enough" cash is very important, but having "too much" can be dangerous, foolish, or both.
I am also an apple investor. If they have $50B of cash they have no use for, then they are forcing me to be invested in government bonds. I'd rather have the money myself, and invest it in something that gets better than a .5% annual return. Using the dividend to buy more Apple stock would be better than the current situation.
They don't need those for immediate ops right now, but having tens of billions readily available is a great chip when discussing deal with manufacturers. It means you're able to put billions on the table upfront at a financial moment's notice. Apple's billions in the bank are a major asset in their negotiations.
I wasn't stretching anything. Tim Cook said Apple has "more than we need to run the company." Running the company requires having cash for immediate, future, foreseeable and non-foreseeable events. "More than we need" means there is some that there is no need, or "no use".
They NEED to do something with the cash reserve because they are a publicly traded company, and investors are greedy. While it would never realistically happen, a coalition of investors could demand cash distributions and threaten to vote out the board if they don't comply.
What kind of psychotic, suicidal investors group would kick out the board that has secured the kinds of returns this board has? I mean, I understand what you're saying but it seems like it would go against common sense to do something like that.
The kind that feels they could put in their own board members and have them immediately distribute Apple's cash hoard to the investors, at which point the investors cut and run. I don't think Apple has so much money that this is a profitable gambit at the moment, but at some bank balance you'd be stupid not to at least contemplate the option (especially since you can't expect the stock value to grow at its current rate indefinitely...).
I see a lot of posts like this one talking about how apple NEEDS to do something to lower its stockpile of money but none of them seem to explain why. could someone tell me why holding $100 billion in cash is worse then doing stock buy backs and or issuing dividends if the market takes into consideration its large cash reserves when pricing its stock.
I'll say it again. Apple should buy Disney because they can provide Apple with gold plated content, it would actually be a halo brand for Apple, and their worldwide brands are highly compatible.
When Apple had $30 billion and Jobs was alive, it was possible for Apple to take control. Today they could buy all of it at a premium and still have $10 billion left over.
So you want them to be like Sony, who has gone down the drain since purchasing entertainment businesses? I would prefer Apple to continue doing what they do.
Based on the number and independence of the business units at Sony, such a comparison is strained at best. The real reason they shouldn't buy Disney is that it would be an ideological step backward. Disney creates entertainment in the same way it's been done for decades. Apple is interested in how the future of entertainment will be produced/consumed.
This is a really good analogy that I hadn't previously considered. Sony has often seemed to trip over itself as it tries to sync up what's happening in their electronics and their content divisions.
Sony is an interesting comparison. But they haven't had an iconic product associated with their brand since the BetaMax, and I don't think anyone could differentiate their content from Fox in the way that Disney's content is readily identifiable.
I.e. name three specific Apple products and three Disney movies - now try that with Sony electronics and movies.
If Apple is really looking to buy a big company, I would guess they wouldn't buy anyone that killed agreements with other media or network companies (Sprint at $7.3b market cap(1) for example).
AMD/ATI might be nice at $5b would be good for the chip tech, but would probably have serious problems with Intel and a lot of PC industry. NVIDIA at $9 would be interesting.
Adobe at $16b has been a rumor favorite. It would probably be a buy-it and then spin off / sell a lot of the enterprise facing parts to someone else.
The article hits on a key point, though. Consider that during Jobs life he saw giants like AT&T and IBM falter, and other giants like Microsoft rise from nothing, and then falter. He used to tell a story about how they were 1 week from defaulting on payroll when he returned in 1997. I think he certainly wanted to keep the money for a "rainy day" scenario.
Which brings me to the most interesting thing that Apple could purchase: they could afford to pay an average salary of $300,000/yr to every one of their employees for 5 years with absolutely no revenue, and they still wouldn't exhaust their bank vault. If it were up to me, I would say they should start something equivalent to Bell Labs or PARC, but they won't. To do so would be antithetical to the very character of the company. In other words, quite the bind to be in...
Apple is a publically held company. Disposing of profits by giving it all to employees would be a wonderful way to create an instant shareholder lawsuit.
The cash held by Apple is built in to its share price. If a stock holder wants some of that all they have to do is sell some shares. Undoubtably there are some tax considerations regarding capital gains vs. dividends but the fact remains that if Apple distributed a significant amount of its cash to shareholders, then the share price would inevitably drop by the same amount.
Paying dividends essentially signals that company does not see how to spend money and has no long-term strategy for growth.