I think a dividend is imminent because at the rate of inflation that is likely to occur over the next several years, holding that much cash is a huge mistake. If there isn't a use for it in the long-term, and they can reasonably expect to print more, I agree that they should start dispersing it to shareholders.
Typically I would think the beginning of a dividend program to be a signal that the company has hit an innovation wall and doesn't know what to do with its cash. I think this doesn't really apply to Apple because cash is going to continue to flow freely into it a ridiculous rate for the foreseeable future. Hardware is extremely profitable, and they are still better positioned than anybody else to ride the shift to mobile. I still think Apple is a strong buy.
> at the rate of inflation that is likely to occur over the next several years
Do you have a reliable source on this?
> Typically I would think the beginning of a dividend program to be a signal that the company has hit an innovation wall and doesn't know what to do with its cash. I think this doesn't really apply to Apple because cash is going to continue to flow freely into it a ridiculous rate for the foreseeable future.
Apple's been building up this cash stockpile for so long that it's pretty clear they've long had more than they know what to do with. Having a cash position isn't really necessary either--at this point in time Apple could easily borrow at rates much lower than their expected return on investment anyway.
Yes- it's called the Federal Budget. When the US continually runs a deficit and prints money to make up the difference, that cash goes into the economy without any real output in GDP. That causes currency devaluation, and in turn, inflation.
Towards the end of 2008, $700 billion dollars were injected into the economy while the US was in the midst of running a multi-trillion dollar deficit. Taxes weren't raised, so that money came (an continues to come) from thin air. There is virtually no chance inflation does not steadily increase in the coming years. I can confidently say that because I see no reason to believe that there will either be a sudden burst in GDP to increase tax revenues, a reduction in spending, or an increase in tax rates sufficient to make up the difference. Remember, economic effects tend to lag. The mortgage crisis occurred after several years of irresponsible borrowing and lending.
I'd be curious to hear more about your inflation expectations. Specifically, why Krugman et. al. are incorrect in arguing that the economics of stimulus work differently in a depressed economy (or why you think the diagnosis of the US as a depressed economy is incorrect).
Also, I'd be curious as to why you think this didn't happen in Japan, and what are the critical differences in the US that will cause inflation here.
I'm curious because I hear the "inflation must come" argument often, but I haven't heard it squared against Krugman and Japan. I'm not an expert, so any guidance would help my understanding.
I'm not sure what Krugman was referring to, but I'm guessing he was making the case that because people tend to not spend money as freely in a depressed economy, that the risk of inflation or hyperinflation is mitigated to an extent. Effects of inflation become exacerbated when there is an acceleration in spending, whether it be on goods or currency or commodities, because nobody wants to hold the currency. For the past few years, this hasn't been a problem because people are scared and seeking safe havens, which is how most people view the dollar. This doesn't change the underlying fundamentals.
Here's the thing- there is a fundamental law in economics called supply and demand. Nobody, not the US, nor Japan is immune to it. If you increase the supply of something, and there is not a corresponding increase in demand, that thing becomes less valuable. In the US there has been an enormous increase in the money supply with no corresponding increase in real output. That makes the money circulating in the economy less valuable. Whether the costs of goods go up today, tomorrow, next week, or three years from now is somewhat immaterial. All of the evidence is in place that at some point the costs of goods will almost certainly go up, unless there is a shift in demand or a decrease in the money supply.
EDIT: Now we see that Apple is going to be dumping $45 billion into the economy. Not a good signal of strength for the dollar.
Thanks for the enlightenment. Reading between the lines, the case of Japan's missing inflation might be a variant of "in the long run, we're all dead," given the decades of stimulus and low inflation. It'll be interesting to see how it plays out here.
Apple didn't exactly stuff that $45 billion into mattresses or anything, it was already "in the economy". Large corporations keep cash invested in securities.
at the rate of inflation that is likely to occur over the next several years, holding that much cash is a huge mistake
Market expectations for inflation are usually factored into interest rates already. While the market could be wrong, Apple probably shouldn't get into the business of speculating on inflation rates.
>Market expectations for inflation are usually factored into interest rates already.
Actually that is not true. Historically Interest rates on currency-based investments have not caught up with inflation and taxes. Majority of Apple's cash is invested in long-term securities though so their investment is protected from inflation.
Whether currency-based investments have historically provided positive real returns is an entirely separate matter from whether it is possible to time investment in currency-based investments based on expected future inflation rates.
>at the rate of inflation that is likely to occur over the next several years, holding that much cash is a huge mistake
Actually majority of Apple's cash is invested in long-term and short-term securities so they are protected from inflation.
I don't think Apple will pay a dividend.
1. the Massive increase in Apple's stock price is more than enough compensation for shareholders. A dividend will just be drop in the bucket compared to the capital gains investors are going to earn in the next months or years. Paying dividends at this stage is a waste of money.
2. Apple's PE is around 16. AAPL is still VERY cheap. Compared to Google(20) and Amazon(134), both companies not nearly as profitable as Apple.
3. There is still a lot of room for growth (TVs, China, NFC, etc.).
4. Stock buybacks is more tax-efficient compared to paying dividends since the investors will have to pay the 15% tax rate if they get paid dividends.
5. Share repurchase may FURTHER increase stock price since it will increase EPS, ROE (Return on Equity) and ROA (Return on Asset) and decrease PE. Improved financial ratios will make the stock look even more attractive to investors.
CONCLUSION:
Given these 5 factors. I believe Apple WILL NOT pay a dividend.
Amazon's PE is very misleading. Their revenues are much higher than their profits and can be monetized more in the future. They aren't trying to maximize profits, currently.
Typically I would think the beginning of a dividend program to be a signal that the company has hit an innovation wall and doesn't know what to do with its cash. I think this doesn't really apply to Apple because cash is going to continue to flow freely into it a ridiculous rate for the foreseeable future. Hardware is extremely profitable, and they are still better positioned than anybody else to ride the shift to mobile. I still think Apple is a strong buy.