I hate to say this is a bad idea, but dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere.
Combining a stock buyback plan is smart at least because perhaps they can balance the two and counteract the dividend effect by buying up shares.
In reality Apple could probably just become a private company by buying back most/all the public shares, but I doubt they want to do that. There are obvious PR benefits to being the "most valuable" or "most profitable" public company in the world.
Also, as far as space travel and exploration, that makes no sense for Apple. Apple is not a company that invests huge in R&D projects that won't pay off for decades. It would ruin their incredible focus on what they are doing now and for the next 5 or so years. If you get too far out ahead, you build things the world isn't ready for yet or you stop executing on the here and now products and services.
Apple's still got a ton of room for potential growth on phones, pc's, and tv's. There are also a whole slew of "post pc" computing interfaces and devices that haven't even been dreamed up yet. Space travel would be a distraction.
> dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere
this is exactly what they're trying to signal because its true. what's wrong with that? they've been extremely profitable while not spending the $45 billion they're giving back to shareholders, and they can continue to be profitable without it.
> In reality Apple could probably just become a private company by buying back most/all the public shares
no it couldn't. it's market cap is 550B. it's cash reserve is 100B.
more generally, a company cannot buy itself because the shareholders actually own the cash the company holds. generally, if a company has $X dollars of cash reserves, then the market cap on that company would be > $X.
No, they'd just require the private company to disclose the same sort of quarterly information that a public company does.
You're clearly alluding to Facebook being "forced" to go public, but they too could remain private with 501 investors. But once they're revealing their numbers, they figured they might as well jump in with both feet and do the IPO.
Typically when a company goes private, it buys back the shares from the current shareholders. The number of shareholders would then drop back under 500.
Not to mention the inherit problem of trying to corner a market. It would be hard to buy the shares back without prices being driven up....https://en.wikipedia.org/wiki/Silver_Thursday
Even with the dividend and share buyback plan, Apple is expected to continue to add significant amounts of money to its cash balance, which stood at $97.6 billion at the end of 2011.
If Apple consumes about $15 billion a year in cash for its stock buybacks and dividends, it is generating so much new cash from its business that its total cash balance at the end of fiscal 2013 could be around $180 billion, estimated Gene Munster, an analyst at Piper Jaffray.
if the market cap of the company fell below the cash (net of debt obligations) of that company, the investors could liquidate the company, take the cash, and make a profit. thus, it's pretty atypically for market cap to dip below asset value, and even more atypical for market cap to dip below cash holdings.
Actually, finding companies whose market cap is less than asset value is a great way of insuring you're buying shares at a discount. This is pretty rare in technology companies, which are generally valued far above assets, but it's possible to find this sort of thing in more predictable sectors.
For more information, you could look at Benjamin Graham's "The Intelligent Investor". This is a very good introduction to investment, but it's also quite a long read.
I disagree with your assessment of dividends vs. share buybacks. My opinion mirrors that of Mark Cuban. A few choice quotes from [1]:
Dividends offer _true_ returns:
They send a message to shareholders that you want them to stay as shareholders and are rewarding them for their committment to your company. Its a reminder to shareholders that the business investments you have made have actually worked and the reward is that cash can be returned to shareholders . That profits are more important to shareholders over the long term than trying to convince wall street to increase your PE [via buybacks].
Meanwhile... buybacks just perpetuate insider dilution:
Companies continuously issue new shares to their managers without asking their existing shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution of existing shareholders’ stakes, death by a thousand dilutive cuts. If that isn’t a scam, I don’t know what is. Individual shareholders have nothing but the chance to sell it to the next sucker. A mutual fund buys one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six weeks later you own less, and all that money went to insiders, not to the company. And no one asked your permission, and you didn’t know you got diluted or by how much till 90 days after the fact if that soon.
The quote describes stock grants and stock options for managers (and employees). That's orthogonal to the question of dividends vs buybacks.
An individual investor might prefer dividends for tax reasons, while a mutual fund might prefer buybacks. But other things being equal, both sorts of investors don't want unnecessary dilution.
This is an interesting point of view, but the article you linked to misses a fundamental point of the "golden parachute" offered to CEO's: if a leading executive messes up, you want to incentivize them to come forward, not to cover up their mistake for fear of losing their jobs.
Is a golden parachute ideal for this? Perhaps not, as it does introduce some strange incentives overall; but I'm not aware of anything better.
Parent's article discusses why stock buybacks damage shareholder value, by referencing the ability of executives to generate shares and sell them on the open market, and thereby dilute existing owners without their consent. (Note that I'm summarizing the argument, not agreeing with it.)
Without either dividends or a stock buyback plan, stocks are no more an investment than baseball cards. The point of not paying dividends is so you can reinvest your cash to increase the dividends you can pay later, and Apple's dividend is so low that they're clearly planning to reinvest the vast majority of their cash even with these dividends.
I don't get the criticism that Apple has no better way to spend its money. It's been building a cash stockpile for years, so obviously they've had this "problem" for years. They're a public company that has to report the size of their cash stockpile every quarter; having a growing cash stockpile already signals they haven't found a way to somehow reinvest their cash. Paying a dividend, especially such a small one, hardly lets the cat out of the bag at this point.
Furthermore, interest rates are still rock-bottom. If Apple suddenly needed a whole bunch of cash to invest, it wouldn't be at all difficult for them to borrow at much, much lower rates than their rate of return. It might be more risky and costly than simply spending a war chest, which is a good reason to keep 55 billion around (plus whatever they pull in over the next three years) while distributing the other 45 billion.
Well put, I think that Apple has been working on this for months and they have a pretty good idea of what they're doing. They have worked out a very conservative amount of money to give back, and still have plenty to keep in the warchest for any R&D or M&A. With $55 billion around, they could outbid Microsoft on any acquisitions that they want (I think MSFT has close to $40 in their chest, but don't quote me on that). And before you mention that Apple is not known for acquisitions, they're also not known for buy-backs and dividends; Tim Cook might be shaking things up how Apple is doing this from a business perspective
Apple's cash reserves grew about $30B last year, they're announcing that they're going to spend $45B over the course of 3 years. Assuming the current cash reserve growth continues at the same rate, I really don't think the market will look at the dividends as not knowing how to spend their money...
Both dividends and repurchasing are ways to distribute money to shareholders, and are from the point of view of the Miller--Modigiani theorem equivalent: from this abstract viewpoint, neither should affect the value of shares.
The differences are
1. Buybacks are usually more tax efficient, because with dividends, profits are realised at the point of sale;
2. Buybacks tend to be procyclical, since companies get a bargain when their shares are undervalued and overpay when they are overvalued. There is some evidence that overall, companies do not get good value for their shareholders from share buybacks. Also, many stock options have the effect that buybacks reward shareholders better than dividends.
I think a mixed dividend and buyback policy is wise. Apple shouldn't be hoarding the cash, and they shouldn't make poor value acquisitions.
To take themselves off the stock exchange, they would need to issue bonds valuing around $500 million, and so become a highly indebted company. This would be tricky, and it is not obvious why this would be in Apple's interest.
There are institutions, e.g. pension funds, that only invest in equities that provide a dividend. By offering a dividend, Apple is making its stock more widely available => more buyers => more shareholder value.
I laughed when I saw this in the press release. Anyone conservative enough not to buy a stock unless it provides a decent dividend would not buy Apple. Apple is not a value stock.
Wow, a downvote brigade for calling Apple a growth stock? There must be lots of MS fanboys here, or Apple fanboys who don't know that the opposite of "value stock" is "growth stock".
With a P/E of 16.87, AAPL a growth stock. Or overvalued. With a P/E of 11.71, MSFT is value not growth. With a P/E of 135.1, AMZN is ... pricy.
It isn't uncommon for management to partner up and take a company private when they are already large shareholders. In the case of Apple, this is not the case. Jobs owned more of Disney (almost 8% via the Pixar deal) than Apple on a percentage basis (less than 1%).
What are their other options other than simply accumulating cash and not being able to spend it versus a dividend. Having a war chest is nice, but at a certain point it's being wasted if you could basically buy any company on earth tomorrow if you wanted.
That's how I saw it, however I think the remaining ~$40 billion is sufficient to continue a dominant position in where they excel. Things only evolve so fast, and unless they were planning on extending into specializing into other markets, there's only so much money that can be spent in one area before you'll potentially extend yourself into other areas too much and dilute expertise/focus. Apple's brand can't dilute too much either, though there are some areas I can see them being able to excel in - but they might not have the total foresight or incentives needed to maintain dominance in those areas, as experts already exist in those fields and they'd be competing for human resources - they do have ~$40 billion left + will surely make many more billions to use however they please.
>"dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere."
In Apple's case, what it signals may be a little worse - i.e. that they have given up on trying to find those better ways despite having had several years to work on it as the cash accumulated.
If Apple had announced dividends a year ago, before Jobs' death, it would look like Apple had a long term vision - and there was certainly opportunity to have provided dividends.
More importantly, there was opportunity to spend the money. If Apple couldn't figure out how to make a dent in $30 billion or $50 billion or $70 billion, it doesn't look like their problem has gotten any easier.
It's pretty simple when you think about it. Apple has a certain hurdle rate for their projects that is extremely high, when compared to other companies. The only projects that can make it are ones that can draw on their existing resources. For them to go into something completely new would aberrate from their investment philosophy that has made them the most valuable company. On the new product front, I have more confidence in Apple knowing that they plan to think things through rather than announce something just for the sake of spending their hard earned cash.
"I was talking recently to someone who knew Apple well, and I asked him if the people now running the company would be able to keep creating new things the way Apple had under Steve Jobs. His answer was simply "no." I already feared that would be the answer. I asked more to see how he'd qualify it. But he didn't qualify it at all. No, there will be no more great new stuff beyond whatever's currently in the pipeline."
Looks like they probably won't be dreaming up innovative devices anyway unless a new Steve Jobs takes over.
Despite the fact that you're writing on a website written by one of the two people whose opinions you're quoting, I really don't think extrapolating the future based on two opinions is going to fly here.
"In reality Apple could probably just become a private company by buying back most/all the public shares, but I doubt they want to do that."
They can't use the shareholders' money (which is what this is) to take themselves private. You can't buy something from someone with their own money.
EDIT: Any of these downvoters care to explain themselves? Apple can't buy back most/all of the public shares using this pile of cash, because it belongs to Apple, which belongs to its shareholders. (Even if they could afford to do it, which they can't)
A public offering is the company saying "here is ownership in exchange for your money". A share buyback is the company saying "here is money in exchange for your ownership."
You're getting downvoted because it doesn't make sense for a company to be able to move in one direction, but not the other.
Right, they can buyback, but no matter how far they go in that direction they won't end up as a private company.
The shares they purchase don't transfer the ownership they imbue to the board of the company -- they are either retired, held as treasury stock or given to other shareholders. The majority shareholders remain majority shareholders of a smaller amount of stock.
To think of it in a very simplified way, if the company bought back all the shares except 10 from some staunch holdout, that guy would own 100% of the shares of Apple, (and each share would have a stratospheric price).
For the board/management to take control of Apple from the shareholders (which is what people mean when they talk about going private, really), they have to personally acquire more shares.
They obviously can't do this with the company's money, because shares bought with that transfer to the company and either dissolve or are transferred. They have to use outside finance to do it.
This is what I mean about you can't buy the company from the shareholders with their own money.
(They could in the simplified world use the money to buy back the stock and grant it all to board members, but in this world there is a tonne of legislation preventing this, and if they did it to take control out of the hands of shareholders they'd be open to action.)
> I hate to say this is a bad idea, but dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere.
The ever-present notion that the leadership team of what is now one of the largest companies in the world has no real idea what they are doing is fascinating to me. Perhaps they deserve a bit of credit.
Getting good returns from a 100 billion dollar investment is hard. Just as an idea of scale that's enough money to more than double world wide fusion research spending for the next 30 years. Suppose they started down that path and 20 years from now started building useful and highly profitable fusion reactors that beat coal power plants. Now what if that failed. Measuring the risk / benefit curve on such an investment is hard. But, Apple could afford to fund 5 other projects on that scale without touching their cash horde.
IMO, Apple starting down the dividend path is simply the only reasonable course when faced with that sort of cash flow.
> Getting good returns from a 100 billion dollar investment is hard.
You don't play with 100B in the same way that you play with 100K.
There are few times when a really compelling buyout opportunity emerges. And it is at those times that you want the warchest. Until then, you need to keep the dry powder.
As an example, Buffett wouldn't be able to negotiate the really sweet deal with BofA last year (5B, paper profit ~ 2.8B at the onset) without the cash balance.
I don't think this hits their warchest at all. The # I heard on NPR this morning was about 2.5B/Quarter, but their profit is about 13B/quarter. Even with a 10B stock buyback plan, that's not quite a quarter of profits. Disregarding the buyback, they should still be adding to their warchest. I believe it's only when they announce a special, one-time type of dividend that it signals they don't think they will have anything to do with the money. For example, Ford basically did that a few years ago (although in retrospect 10B in electric research or something might have been wiser).
You're right. Apple has so much cash that the only thing that makes sense is to both pay out quarterly dividends AND buying back their stock. Even though AAPL is still considered a GROWTH stock.
NOTE:
Apple earned ~$13b profit last quarter and it's only going to grow. $15b x 4 quarters = $60b PROFIT PER YEAR.
They can easily afford $45b over the next 3 years considering they have more money than God.
They're riding a hit. I know this borders on heresy here, but the iPhone/iPad ecosystem is really just one very good product that hit an amazingly lucrative sweet spot in an emerging market. They're printing money with it because they got there first and best (c.f. Microsoft), not because their "leadership team" is reliably able to produce hit after hit.
Even Jobs only really got one money-printing-quality hit like this in his career. Most of "his" other stuff was great, sure, but mixed with equally great competitors (Pixar -- Toy Story was huge, but so was Titanic) or never managed to break into the market due to bad timing or market conditions (Mac OS).
Seriously: if all that Apple can do with that $100B is produce a top flight movie studio or a distant-second competitor to an established monopoly, it's not enough. They should give the cash back instead.
Pixar didn't enjoy iPhone-like profitability (edit: that's not the same as revenue, everyone knows that, right?). And the reason is that it had very successful competitors. The Mac likewise. That's not good enough. Apple investors can make their own decisions about buying into new products like that. The GP post was implying that the "leadership team" was likely to do better.
My point is that (1) no, they really can't product another iPhone-like hit (that's a once-a-generation thing) and that (2) Jobs is dead, so there's a serious question about the "leadership team" that investors need to see as a risk. Is it really "safer" to leave your share of that $100B egg in one basket, or just to put it into a mutual fund?
Personally, I'd say Pixar seems to be the Apple of the movie industry. A few products, done right, and hugely profitable:
> As of February 2012, its films have made over $7 billion worldwide, with its $602 million average gross by far the highest of any studio in the industry. In addition all the films produced by Pixar are among the fifty highest grossing animated films of all time, with Finding Nemo (#26), Up (#43) and Toy Story 3 (#7) all in the top 50 list of highest-grossing films of all time. - http://en.wikipedia.org/wiki/Pixar
> My point is that (1) no, they really can't product another iPhone-like hit (that's a once-a-generation thing)
They've already put out three in a generation - iPod, iPhone, and iPad. Lumping those three distinct systems into one is intellectually dishonest.
And... the expected Apple fan flames have begun. Pixar, iPod and iPad didn't have anything like the iPhone's level of profitability. I lump the latter in with the iPhone because the current implementations are one platform (no one calls it, ahem, "intellectually dishonest" to talk about "windows" profitability instead of "windows home" vs. "windows server" numbers).
But there's no need, so I'll simplify. If all Apple can do with that $100B is generate another Pixar, Macintosh, iPod or iPad, it is not enough and they should give the money back. To make it seem like a good bet, they need to produce another iPhone. And they can't, because no one can do that at will. We'll see another hit like that in 15 years or so if we're lucky.
The iPhone was the next step in omnipresent computing. You always have your iPhone. It's two steps down from laptops (leap-frogging the tablet, which has come after the iPhone). The next step is either glasses with computer screens (kind of geeky), or voice-interface computers.
With a voice interface, you can shrink a computer down to the size of a wristwatch. Getting data out is a problem (display glasses? some kind of projector?) is an issue, but not insurmountable.
> To make it seem like a good bet, they need to produce another iPhone. And they can't, because no one can do that at will. We'll see another hit like that in 15 years or so if we're lucky.
You can't really compare iPhone and Pixar that way. IPhone was a product by an established company that was already producing the iPod. Pixar on the other hand was a startup (sort of), which Steve Jobs invested $10 million in and sold for $7.4 billion, quite an impressive return on investment.
This completely misses the point (or rather: completely confirms what I'm saying). The question at hand is "What should Apple do with $100e9US". What relevance does an investment of 0.01% of that total have, even if they could get that RoI on demand. With (pinky to mouth) One Hundred Billion Dollars you need to be aiming much, much higher. And they aren't. And even if they could they're just a bunch of Jobs-less yahoos playing with cash that landed in their laps. Be honest: they aren't going to create ten thousand Pixars with that money, they'll be lucky to get five. And they can fund five (or fifty) on existing revenue without the cash reserves.
What's with this idea that they have to pick one and only one thing to do with a hundred billion dollars? What's with this idea that they should spend it all so they don't have any reserves?
I'm not sure. Depends on if you count the iPod, iPhone, and iPad as 1 or 3 products. the 2006 iPod seemed very different from the 2007 iPhone. To my mind, those are different things. I can see the desire to blur the iPhone and iPad, it's just a change in form factor. Thinking back, not many people thought tablets would take off. They seemed sorta like 3d tv.
Although I do not completely disagree with you, Apple's leadership team has reliably produced hit after hit in the last 10 years: iPods, iTunes, Macbooks, iPhones, iPads, app store, etc. That doesn't mean this success will go on forever, but right now, Apple is batting pretty well.
I was right about Apple's plans to repurchase its own stock. I guess I was a little surprised by the quarterly dividend and the amount of money it plans to spend ($45b over 3 years).
Then I realized Apple earned $13b profit last quarter and it's only going to grow. $15b x 4 quarters = $60b PROFIT PER YEAR.
Not all of their profit will be used for the share buy back/dividend, but Apple can easily afford it and still have MORE cash (specially after you factor in cash inflow from its investing activities).
I am in no position to tell Apple how they should spend their money but after reading the articles about Elon Musk today I can't help but imagine how the world could be changed to become a better place with all this money.
And I don't mean that Apple should give money away to charities.
Why not invest in space exploration , electric cars, self-driving cars, medical devices, green energy,... It is not Apple's core business, but "phones" have not been the business of "Apple Computer" as well.
Apple has moved humanity forward with the personal computer and mobile phones. I don't want them to stop with computers, smartphones, tablets or TVs.
I want Apple to aim for more than just consumer electronics - but I guess we won't see that happening.
"Why not invest in space exploration , electric cars, self-driving cars, medical devices, green energy"
Why should they? Just throwing money at something doesn't guarantee success, and deviating from a company's core competencies can become a distraction that drags down the parts of a company that are succeeding. The dividend puts money back into the hands of investors that can choose to either re-invest back into Apple stock, or invest in companies whose core competency is space exploration, electric cars, or some of the other areas that wouldn't be in Apple's expected domain.
That's true, but the shareholders have delegated the decision on how to spend the money to their legal representatives on the board. There's a strong presumption that the shareholders have elected board members whose decisions they support, so if the board makes decisions and the shareholders don't vote them out, those are presumed to express the preferences of the shareholders. Note that those decisions do not have to maximize shareholder profit. Shareholders can elect board members who commit to maximizing shareholder value, but they can also elect board members with a variety of other preferences and ideas about how to best run a company, or how to best spend its cash on hand. The board can legally pursue a wide range of strategies, and shareholder lawsuits basically never prevail (in the U.S.) absent some kind of overt wrongdoing, like secret side deals made by board members or something like that, or else shenanigans related to mergers and equity (e.g. some kinds of dilution).
I tend to think of it as the board being in possession of the company that the shareholders have all but signed over to them; with shareholders retaining notional ownership, mainly enforced via the rarely exercised right to revoke the delegation of power if they get sufficiently angry.
So, the clarity you've added here is neat (I hadn't drilled down into the specifics of what "fiduciary duty" meant in law, and also had been using "maximize shareholder value" as a shorthand for it), but if you search, you'll find lots of instances of boards being sued for breaches of loyalty over company business decisions. Courts seem to find lots of ways to connect the dots between "putting the interests of the corporation first" and "not signing off on dumb business decisions, like giving the CEO a huge raise in a year where the company missed its numbers".
Regardless; Apple is not going to space, at least not until it can figure out how to make money doing it.
Board members and executives have a fiduciary duty. Executives and board members who knowingly and willfully undertake actions that decrease the value of the company can be held personally (financially) responsible for those actions. (That's why you purchase director's and officer's liability insurance.)
They have an extremely vague "duty of care", i.e. to run the company in a manner in accordance with the wishes of the entities they serve as representatives of. Beyond that, they don't have any specific obligation; shareholders can, at least in principle, have many different wishes, and so elected board members can represent a variety of positions, from an aggressive profits-uber-alles position to some kind of safeguard-the-brand-reputation-for-generations viewpoint.
The main enforceable obligation is a negative one, to not actively do things that benefit themselves at the expense of the corporation they oversee, e.g. by making decisions primarily designed to enrich themselves personally. Almost anything that isn't active wrongdoing is defensible though; if a board member thinks in good faith that doing X would enhance the goodwill towards the Apple brand, and in good faith thought that prioritizing brand goodwill was the best long-term strategy, it would be fine to undertake a short/medium-term money-losing course of action to pursue the strategy. Courts generally defer to board elections to resolve those kinds of disputes over strategy, since courts are very bad at predicting whether a given strategy is actually in a particular entity's long-term interests.
Insurance these days is more often directed at government regulations than shareholder lawsuits; board members have various possibilities for personal liability if their company is doing illegal things on their watch.
That is to stretch the definition of ownership quite a lot. Share holders have no rights to or control of any portion of the cash balance of a company that are not granted to them by the board.
The board represents and has a fiduciary duty to the shareholders. The term "fiduciary duty" is not abstract; it has legal force, hence the frequency in the news of another investing term: "shareholder's lawsuit".
I think they're saying that it's the shareholder's money, which is absolutely true.
However that doesn't preclude them from doing good with it, even in money-losing investments, beyond perhaps shareholder revolt ousting the board. There's an oft claimed belief that corporations are somehow bound by corporate law to do everything in their abilities to increase profits/returns for their shareholders. That is not and has never been true. Corporations are essentially mini-democracies, albeit where your say is scaled by your ownership: If the shareholders don't like it they have mechanisms to deal with it.
Nothing prevents the shareholders from taking the dividend and investing it in cold fusion or flying cars. Then you don't even need to take a vote. You just give people their money and they decide what to do with it.
that's not true. it is their money - the shareholders probably just wouldn't like the move and as a result, apples stock price would plummet (but that doesn't really need to bother them - it's not like somebody's just gonna buy the currently most expensive company in the world). however what would bother me more as an investor would be that apple apparently has no idea what to do with all that money (how about expanding R&D even more, like microsoft? and develop the next gen input devices (after touchscreens))
Oh yes it better bother them. Cook and the Board have a fiduciary duty to the shareholders. They can't just go spending money however they want without regard to shareholder wishes or stock performance.
The shareholders of Apple are the owners of Apple. They get the final vote in the end, although it has to be translated through boards of directors and management.
The Apple Board of Directors has a fiduciary duty to investors. If they take action that causes the share price to fall dramatically, thereby losing investor value, you can be pretty sure the Board will not last very long so yes it would matter.
A company? We're talking about Apple. I doubt Steve Jobs would have been caught dead saying that about Apple, and I hope that culture is continuing with Apple. Apple employees, notably Ives, have said over and over that their #1 goal is to create <magical products>.
I would say this is quite a lot of hyperbole. They have refined what others have made but they have not moved humanity forward.
The Haber-Bosch process, Norman Borlaug, the space race, the production of a silicon chip etc have al moved humanity forward. Apple in comparison made some trinkets.
You could argue that they have moved humanity forward in the sense of setting the bar higher for the sort of experience that people expect with everyday things.
Of course they are not primarily a science/research company so they rely on "standing on the shoulders of giants".
Maybe Apple doesn't feel they can be successful in areas other than consumer electronics. Trying to get into another line of business would be a HUGE distraction for management as well as the employees.
As for your green energy comment: I think Apple can do far more to promote green energy by being a customer and driving partners to produce better products than designing their own green business. For example, by buying a shitload of fuel cells for their datacenters, Apple funds Bloom's (or others') R&D efforts. Same with solar panels and other alternatives.
Because Apple's duty is not to pursue community goals. Furthermore, they don't have the competence to make those sorts of investments. Apple is not a philanthropic organization, and it would be to everyone's detriment if they were to act like one.
Apple has been successful so far with a very careful strategy: they focus on just a few markets at a time, only enter new markets if they have a big competitive advantage in those markets and only release new products if those products are a big improvement on the prior status quo.
If they were to spread management attention more thinly by starting separate divisions to do the sorts of entirely unrelated things you describe, Apple could easily turn into IBM or Microsoft. At its heart, Apple is a small company. The main way Apple helps all those other industries is by training engineers to think in the Apple way who then go off and found start-ups of their own. And by making lots of millionaires to fund those start-ups.
(Apple's also investing in some of those industries as a customer. For instance, they invest in "green energy" by buying solar panels for its new HQ building.)
At some level it's necessary for a company as tight and as focused as Apple is to maintain a cohesion in its corporate expanse. They could easily spend their money on growing the company in a myriad of ways. They could invest in pharmaceuticals or unicycles, but the farther afield they get from their core competencies the less likely they are to succeed, and the less likely they are to remain a single, cohesive company.
At the end of the day the key question remains: what is Apple other than just a big ol' wad of money? If Apple is something other than just an amalgam of various profitable enterprises then they should keep on being that instead of trying to be something they're not.
> but "phones" have not been the business of "Apple Computer" as well.
I don't think of the iPhone as a phone at all. It's a computer I always have with me.
Now, the main reason I always have it with me is because, rather than being an additional thing I need to carry in my pocket and always remember, it replaced a thing I need to carry in my pocket and always remember, but the "Phone" feature is the least used feature of my iPhone by far.
This is how Apple approached the iPhone, too. It was initially thought of as an iPod that had the sweet feature that it could replace your phone rather than require you to carry an extra device.
I guess we can ask which other sectors they could disrupt.
Education seems like a perfect fit. They could start their own publishing house to author first-rate dynamic textbooks for the iPad. The content could be better than it is in current books, and it would sell iPads to boot.
Why are you so dismissive? Apple is not the only company that has done this.
Many companies had MP3 players prior to the iPod, but it was Apple's device that completely up-ended the music industry. Now people have access to entire libraries of music on their phone, and a store where they can buy even more.
Can you really say the situation would be better if Apple had blown out in the 1990s and we were at the mercy of Rio and RealPlayer?
I disagree. But it's interesting that you mention Alexander Fleming (it's one m in his name, btw). Fleming actually has some similarities to Apple's role in technology.
Fleming discovered penicillin and its effects, but he abandoned the discovery because he was unable to produce it in quantity, and also did not believe it would last long enough in the human body to cure infections.
It took the work of several others, and fifteen more years, to actually produce an effective drug.
Similarly, those who made various fundamental discoveries and inventions in computing are certainly significant and worthy of attention, but Apple also deserve much credit for making easy-to-use, refined products out of these discoveries, especially over the last ten years.
Giving people better tools makes them more productive in whatever endeavors they pursue. It would be short-sighted to not see Apple's value to society.
With $100B in the bank, I keep thinking that Apple could do a lot more to disrupt of lot of industries.
They could afford to build an entirely new wireless carrier, from scratch (I understand spectrum might be an issue). They could create an entire newly kind of music label that redefines how artists are compensated and how labels make money. Or they could create their own new book publishing company that breaks with the traditions of the big publishers to make e-Books the focus and more affordable. They could probably buy up most of their entire supply chain.
So they must have good reasons for not wanting to use those funds to distrupt those other industries more than they already have. I'm sure they don't want to get out of their core competencies, but setting up subsidiary businesses would seem like a good way to get what they want.
It's the first one that excites me. Apple could completely upend the wireless market by selling data service at cost as a loss-leader for their devices-- or even building lifetime unlimited data into the price of every Apple device. Compared to the cost of building the network, what's $100 million on lobbying to nab some free spectrum?
Alas, I think the current arrangement is working too well for Apple to want to take that kind of insane risk. Shame.
I think spectrum is quite a bit more expensive than that. Qualcomm recently sold a spectrum block to ATT for nearly $2 billion. Granted it was probably a more desirable block (lower 700 Mhz) than most others.
Yeah, that's a good point. But even a billion dollars wouldn't put it out of their price range. I'd also imagine they could drum up serious public support by offering to give everyone free cell service, and maybe squeak out a legislative discount.
Not exactly surprising or bold, i.e. it is the easiest way to deal with the surplus of cash. However, it could be seen as an indicator that Apple's management cannot figure out how to use all that cash to continue the company's growth. In that sense, the announcement of a dividend is a bellwether moment.
A big acquisition could just end up being a distraction from their core businesses. There is probably only so much you can spend on improving the current supply chain, $100 billion+ is a crazy large amount. What if they feel they can continue growth without spending every last cent?
A more positive way to see this is that Apple has become so profitable that they can continue funneling huge amounts of cash into everything that they want, and still have lots left over.
But I agree with your sentiment. It's a bit sad that Apple seems to have maxed out their ability to use money on themselves.
Or that is dosent need all of 100 billion dollars in cash to continue its growth.. If you look at the details, they will use 45 bil over 3 years, so in 2015 I believe they'll still have about 100 billion in cash.
They're now accumulating $40 billion per year in cash (for likely fiscal 2012 numbers).
So they'll continue to add to the stock pile of cash most likely. By 2015, under this plan, they'll have perhaps $135 to $150 billion in cash, unless they increase the buy-backs or dividend further, and that's assuming their annual profit stops growing.
As the world's largest corporation, they are now under intense scrutiny by the US Government, which prefers to leash all massive corporations.
Apple is not allowed to spend its $100 billion buying companies, even if it wanted to. For example, they could buy HP and Dell and shut them down (maybe all PC manufacturers in fact, just with cash); such would not pass anti-trust concerns. They could buy Facebook with cash + stock; again, that wouldn't make it through anti-trust review. And so on.
Even though they're not formally regulated under anti-trust just yet as, say, Microsoft was - their actions are indeed strictly limited by what the government will allow them to do.
I can't think of a single business that Apple could buy (note: could buy, not 'look at the market cap and assume that is what it costs to buy the company') that would give it a level of control in an industry that the government would care about.
Disney would actually brighten Apple's halo, they have a devoted customer base which would accept the merger, and produce the most salable content in the world.
I can see that (and re: antitrust I don't think the gov would have a problem with an Apple/Disney merger either), but I think Apple see themselves more as the enabling platform.
Why take a risk on the downside of creating content when you can charge a 30% toll across all of it? Also a different type of business and model. It would also leave them in conflict with the other media companies.
What I could see is buying Netflix, but Apple would be in a better position to just build that from scratch with better terms (again, the toll for accessing the Apple ecosystem/platform/whatever-you-want-to-call-it).
The other one is Akamai - Apple has been a long-term customer (probably one of the largest), they are delivering a lot of content (and ever increasing) but don't have any real hardcore infrastructure in the way Google and Microsoft do.
The idea of buying Netflix doesn't get Apple into Asia, Continental Europe, or the Africa. It also doesn't do much more than spend the interest on $100 billion. Akamai would put even less of a dent in Apple's cash pile.
Purchasing Disney isn't primarily driven by the fact that they are a movie studio. The purchase makes sense because of Disney's existing media portfolio and the worldwide demographic which their properties attract.
Apple could buy any one of them, either through friendly or hostile means. Not a single one of those would make it through anti-trust. Shareholders for Cisco would love to get $200 billion for their company; the US Government would never allow it in a million years. Shareholders for Amazon would love to get $200 billion, and they'd likely outvote Bezos' family holdings to agree to the purchase. Larry Ellison would sell Oracle for $300 billion in a heartbeat, and all shareholders would agree. Intel shareholders would instantly take a $300 billion bid; the US Government would never allow that purchase either. Apple also would never be allowed to gobble up either of the telecom monsters; AT&T shareholders would take a cash + $250 billion in shares deal, and Verizon shareholders would easily sign off on a $200 billion deal.
I think Apple would love to own their own telecom network, given their love of all things integrated. The things they could probably do in owning something like Verizon's network would be astounding. It would never be allowed.
The test for antitrust is competition being reduced to the point that prices can be controlled with monopoly-like behaviour, or suppliers are cut out from supplying competition.
Applying that test to all of those companies doesn't give Apple supplier control, extensive pricing control or monopoly power in any market.
for eg. even acquiring HP would be total 'PC' market share of ~25%. The only one that may be a concern is ARM, but that doesn't mean mergers are stopped, it just means that agreements are reached (for eg. as with Google and ITAR)
Furthermore, except for AT&T, Verizon, and possibly ARM, none of those acquisitions would be strategic for Apple. Intel is doing exactly what Apple would want them to do anyway, HP and Dell offer nothing Apple doesn't already have and a bunch of stuff Apple doesn't even want, Facebook and Amazon are overpriced, Google is probably overpriced and doesn't fit into Apple's strategy, and Oracle, Cisco, and TXI don't fit into Apple's strategy either.
Everyone here is missing the real goal of this dividend: removing uncertainty;
In much the same way that the stock was held back while Steve was alive because there was so much uncertainty about his health, but since his death the stock has been on a $200+ rampage. There's been speculation about what Apple might do with it's cash hoard for so long and the uncertainty has always been weighing on some investor's minds. By actually doing something with some of it, they've laid a path and removed the uncertainty.
I don't know much about stock and companies with money, but people on this thread are implying that Apple must get rid of it's cash? Why? Surely cash is good? Safety net? What if the sales plummet you don't go out of business, etc. etc.?
the Wall St logic is that since Apple are not spending the cash and it is just sitting there and earning almost nothing then you are better off giving it back to investors to invest for themselves (buying t-bills isn't hard, we can do that ourselves).
the century old idea of stocks (and what buffet et al subscribe to) is about generating a yield from profits. the secondary effect is that now those types of investors will buy into Apple since it yields a dividend, like a good old blue chip stock should (which in-turn raises demand for the stock, which in-turn raises the share price - meaning the cash is being put to better use).
They were pressured by wall street to actually do something with the money.
I for one would have liked to see apple carry the cash balance. Sure they aren't making much from the cash, but I'm pretty sure there are better uses of the money. For example, why not buy a few suppliers?
Apple believes that it can offer a better return on that cash by giving some portion of it back to it's owners/shareholders than by continuing to hold it all in reserve. That's really all this is about.
> The CEO and board have a legal responsibility to use those funds in a way that maximizes shareholder return or return it to the shareholders.
Please stop spreading this and related myths about the legal obligations of corporate officers and directors. They have a fiduciary duty, which has nothing to do with "maximizing shareholder X", or taking any other particular course of action.
These myths are simply a way to fool the masses into accepting amoral people acting in ways detrimental to society.
They make more money every quarter than they plan to pay out with dividends or stock repurchases - so their cash hoard will continue to grow...just more slowly now.
This is a strategic shift to turn the apple shareholder basis from a hedgefund hotel to a dividend fund stock. Very smart as in a deflationary shock hedge fund liquidate profitable assets first. With the recent AAPL performance the stock is probably on top of the list. Most interesting fact of the call: "Apple had a record weekend" Tim Cook (referring to sales start of the new ipad.)
The best part of this is that it is leadership for the rest of S&P 500 to start paying a dividend when they can't effectively invest parts of their income stream.
The alternative is something like Microsoft, which couldn't invest the money but still tried with all sorts of terrible acquisitions. This is a better alternative for shareholders.
The expectation of a larger dividend is what has been driving the share price up recently (which is why it will probably fall today).
I don't know where that expectation came from. First Apple had the problem of repatriating international funds, so this was never going to be a $30, $50 or $100 (some crazy estimate) dividend.
Second all precedent from similar companies issuing a first dividend (well not first for Apple, but first for the 'new' Apple) such as Microsoft and Cisco is 1-2%.
I don't think the buyback will be very effective, not against the bigger dividend expectation.
1.8% is about par. I am surprised they didn't split the stock. Question now is how far the stock will fall today before picking back up again later on as yield-focused funds buy into the new action.
I don't think you can really point to any one single reason why Apple's stock has been driven up so far lately with any sort of confidence. The market is not always rational when it comes to individual stocks.
There's probably a good argument to made that it could be higher. Their P/E is somewhere around 16, compare to around 20 for Microsoft. Does anyone really think Microsoft is going to grow faster than Apple in the near future? I think the recent stock bump has basically been the market realizing that despite growing very fast, Apple's stock price still hasn't kept up with real revenue growth.
For MSFT, they started dividends in Feb 2003, but then did a huge one time dividend in Nov 2004, $3.08 / share or about 11% of their stock price at the time. So there is precedent for tech companies issuing large dividends to get rid of cash stockpiles.
The dividend and buyback has been an attempt to mitigate the stock price flatness problem. It's a very serious issue for the company, especially at the employee level (what's the use of stock grants and options if they have no value beyond mere cash payments?
On the other hand, employee options are actually hurt by dividends since the option holder takes the price hit on their outstanding options, but does not receive the dividend value.
Haha, yep, that's me. I even owned the stock at the time. And yes, the stock was flat for the next 3-4 years, at which point I sold it and it continues to be flat.
My intuition doesn't feel good about this. Whatever Tim Cook says, if apple draw attention away from product innovation into optimizing for financial markets and pleasing shortsighted loyalty-less public market investors, it would no longer be the Apple that we have come to know over the past decade.
Although it's not part of their core business, from the news that's leaked about Steve Jobs' discussions with a CBS exec who refused to license CBS content because he felt he would be cannibalizing their profits, perhaps Apple could purchase one of these stations to spur the adoption of a new model for TV watching. It might cost them a pretty penny at first, but if it forces the other broadcasters to fall in line, it would be worth it.
Another obvious "lateral" purchase would be a cellular company. It doesn't make sense to keep pandering to the desires of the likes of AT&T and Verizon (4 GB data limit on LTE iPad WTF?) when there's so much more potential that could be realized with a good data plan for iDevices.
The only time Apple had a dividend before was the time when Jobs was not there and innovation left (87-mid 90s). Let's hope this does not signal that.
As a shareholder I'd preferred if they just kept and invested the money in new products. Why not use that money to speed up the real Apple TV? Screen tech? Storage? There are still lots of advancements left in handheld and this levels the playing field a bit. Apple hoarding cash was intimidating to competitors.
Jobs would not have done this. It was the first thing they did when he left in the late '80s and the first thing he ended when taking back over in the mid 90's.
Apple has only become this profitable by abandoning their early days' Not Invented Here syndrome, when they used to design and build their products from soup to nuts, and instead riding the wave of innovation by specialized third party suppliers with off-the-shelf solutions. They have long discovered that it's much less risky and much more profitable to let others do the fundamental component development work, and focus on integration of third party solutions, with occasional guidance towards meeting their goals. Even for a company the size of Apple, it can be difficult to predict where the industry will go, and a few mistakes can leave you dependent on some expensive proprietary technology dead-end while the rest of the industry passes you by with lower prices and superior functionality. It's much cheaper and just as effective against competitors to tie up the world's supply of DRAM than to build a foundry and make all those chips yourself.
True but it is a better path for many things. PowerPC sucked, once they went *nix and Intel it blew up. ARM and flash memory for devices, they push that as well that is not just reserved for Apple's use. Also OpenGL ES won the battle on mobile quietly due to Apple's support of Khronos and the mobile markets they created. Webkit, html5, canvas and more are direct results of their investment and extra cash. I hope that continues. LLVM is another area they have taken to another level.
There certainly isn't anything wrong with making better what is out there and at the same time creating the basis for other products (i.e. Chromium from WebKit) so you really own more of the market as a whole and the direction it takes.
As a game developer, the way OpenGL ES flat out won on devices with no real challenge from Microsoft on DirectX is amazing on that front alone. I'd say whatever they were doing with their money since the mid-90's was right.
It makes sense - this isn't a dividend to lure investors, it's an effort to reduce their cash reserves to a more sane level. There's nothing out there right now that Apple has use for that they can't buy, so why not reduce their reserves a bit?
iOS still sucks in many ways. I hope they are not content with themselves. By the way, why not reduce the share they get from app developers if they are so rich now? Apparently it would be in better hands.
And this for people who don't understand how stock buyback "works"
The stock purchased is "canceled". Yes, canceled.
So if a company has no operation but 100 billion in cash, after a stock buyback of 100 billion, the company is worth $0. It's a super bad deal for the employees who sees nothing, but great for Wall Street traders
It will be interesting to know how much the dividend is. Owners of Apple shares can of course take the money and use it to buy Apple products. It's as if one benefit of being an owner is, you get company a discount.
After reading the article about SpaceX, I think Apple should start their own program. They can afford it. SpaceX is being paid less than 2 billion to go to the space station. I'm thinking:
iRocket
iSpaceShip
iStation
See, there a product family already. And the best part is that the iSpaceShip can only dock with an iStation. So you gotta buy everything.
Combining a stock buyback plan is smart at least because perhaps they can balance the two and counteract the dividend effect by buying up shares.
In reality Apple could probably just become a private company by buying back most/all the public shares, but I doubt they want to do that. There are obvious PR benefits to being the "most valuable" or "most profitable" public company in the world.
Also, as far as space travel and exploration, that makes no sense for Apple. Apple is not a company that invests huge in R&D projects that won't pay off for decades. It would ruin their incredible focus on what they are doing now and for the next 5 or so years. If you get too far out ahead, you build things the world isn't ready for yet or you stop executing on the here and now products and services.
Apple's still got a ton of room for potential growth on phones, pc's, and tv's. There are also a whole slew of "post pc" computing interfaces and devices that haven't even been dreamed up yet. Space travel would be a distraction.