If I'm an Apple (Nasdaq: AAPL) Investor, I Want a Dividend

Email

Now that their stock is up more than 20-fold in the last ten years, Apple Inc. (Nasdaq: AAPL) investors have had a wonderful ride.

On top of that the company has amassed a $97.5 billion cash hoard that would be the envy of any small nation.

However, as a dispassionate observer with experience of past such glorious valuations, I will tell you: If I were an Apple shareholder I'd want a cash dividend.

Apple Inc. Stock Price History
(Nasdaq: AAPL)


In fact, I think investors should certainly demand payout of at least three quarters of that cash hoard.

Simply put, a dividend is the best way for Apple shareholders to get real value out of their investment.

Here's why.

If Apple decided to pay out a $25 billion dividend per annum, allowing shareholders to benefit directly from the company's profits, it would be less likely to diversify unwisely in the future.

By receiving such a dividend, Apple shareholders would find their capital value preserved and their income increased.

However, the temptation of the $97.5 billion cash hoard would remain and management would still dream of the $100 billion acquisition that could revolutionize Apple's prospects.

That's why besides an annual dividend of $15-$20 billion (giving a 3.75%-5% yield on a $400 billion capitalization), shareholders should demand that the cash hoard itself, or the great bulk of it, be paid out to them, by a special dividend of maybe $100 per share.

By doing that, the diversification risk would be removed, and Apple would retain only enough earnings to guard against the onset of recession.

The Larger Case for an Apple Dividend

But that's not the only reason why Apple should do the right thing and start paying a dividend.

The truth nobody seems willing to address in the middle of all this mania is that Apple cannot grow like this forever.

The problem is not accounting shenanigans, but Apple's 37.7% sales margin and 91.3% annualized return on equity in the quarter to December 31.

Those numbers are not just unsustainable, they are completely unsustainable.

That's true even though the fourth quarter saw the introduction of a successful new product, the iPhone 4S and the immense outpouring of very justified international emotion on the death of Steve Jobs.

Without question Jobs was a genius…

He built the most valuable company in the world on the basis of supremely imaginative product development and design. He was indeed unique.

But, being unique, he was also irreplaceable. Apple is perfectly well managed without him, and it has many good people, but other companies have good people, too.

And if Apple is no longer led by a supreme genius, then over time Apple's sales margins of 37.7% and return on capital of 91.3% are history.

Also remember: the company does not have a unique manufacturing capability; its products are manufactured by the Taiwanese-owned Foxconn, which also manufactures for many other brands.

Sure Apple's design is excellent, superior even, but over time, as the unique fashion value of the Jobs/Apple combination fade, people will come to pay only modest premiums for superior design.

How long will this take? Well, I'm neither a technology expert nor a fashion expert, but I would expect to see Apple's margins start eroding about two years from now.

The product pipeline may well still be full of Steve Jobs' last ideas, but by early 2014 those products will have been launched into the market, and Apple will be forced to rely on the work of lesser mortals.

Apple's Fork in the Road

At that point, Apple top management will have two stark choices.

First, the company can remain within the product categories in which it has already succeeded.

In that case, profit margins will decline to at most half their extraordinary current levels, while sales increase only gradually with the overall expansion of the market for those products.

If Apple tries to maintain its price premiums, its market share will erode. Overall, profits will decline rather than increase. Then Apple's share price will decline, making most of management's stock options valueless.

The decline will be moderate, however, and Apple will remain an outstanding company.

But Apple's $97.5 billion in cash gives its management a second option.

It can seek to expand through acquisition, moving into new product categories and expand margins in those products through applying Apple branding and design.

We might see Apple flat-screen televisions, Apple digital watches, Apple home appliances, Apple handbags, Apple SUVs, Apple restaurants and maybe even Apple apples.

By doing this, Apple management will spend the cash, but it will find the new acquisitions contribute little to profits, let alone margins.

Sales will increase, but profitability will become sluggish, and quality control will suffer both in the new businesses and in Apple's areas of core strength, as management is distracted by acquisition games from running the core business properly.

Apple's share price will decline sharply and the company will become a sluggish conglomerate, fit only to be carved up by ruthless Mitt Romneys.

That's why Apple management must be prevented from taking the second route, so much more destructive than the first.

They should read Charles Mackay's 1851 classic "Extraordinary Popular Delusions & the Madness of Crowds" and realize that even the most exquisite combination of product capability and consumer enthusiasm does not last very long.

The challenge to management is this: for Apple's own future, a major dividend payout is essential.

Today's Apple shareholders should demand it.

Otherwise someday, all they will be left with is the remnants of a bubble.

Related Articles and News:

Join the conversation. Click here to jump to comments…

  1. filio poufina | March 5, 2012

    I disagree with the dividend! It is better to buy its own stock! Google has 200mln. shares! Apple
    has 932 mln . shares! Apple has almost double capital. Apple misses yet 1/3 of its capital to be
    even with google no matter if its business is not similar! thanks fp

  2. Beltway Greg | March 5, 2012

    Sorry mate, but those of us who have been around for that 20-fold run are thrilled with the way our company is being managed. No doubt you were one of those doubters who sullied the reputation of Apple and were simply incredulous at the growth. Now, you want a dividend? Sure, I know plenty of companies that pay a much greater dividend than Apple ever will. That's where you should look. You're simply a squatter not a risk taker. We're thrilled with the cash hoard. On the upside you can repost this article in about a year when Apple is around $700/share.

  3. Mark Goldblerg | March 5, 2012

    I don't remember any basic economics… I have to read up on some, but I have a question. As an apple stockholder, who made that small fortune off a small investment ten yrs ago, why does their paying me a dividend, which of course sounds great for me, help them??
    I mean, if they owe us all, each year 25 billions, then that prevents that money from going to R&D, and all that is needed to fine the latest greatest products, and no- they can't keep growing as they have. But they can remain at the top of that game by inventing and creating new products that will help them stay where they are- at the top of that economic engine rather than being replaced by others. Yes… I'd like the money, but why do we actually deserve it, and why does that actually prevent apple from declining?? What I deserve is my 20 fold increase in my stocks worth, which I can trade in for money whenever, that is what I deserve.

  4. PauL | March 5, 2012

    Easily the worst idea yet. $100 a share – you have to be kidding? You do realize the majority of the 100 billion is in overseas accounts and would be subject to heavy taxes. The growth rate is very sustainable for years based on their current market share. Apple handbags? They won't even give proview the ten million they want to go away and you are suggesting they are going to blow their wad. Apple is going to pay a VERY modest dividend and SLOWLY increase it over the years

  5. Tom Ezell | March 5, 2012

    I am and have been an Apple investor and I have received more than ample rewards for being so. Accordingly, I need a dividend from Apple like a moose needs a hatrack!

  6. Jared | March 5, 2012

    I am an apple investor and I am 100% against a dividend if management feels it has better use for the cash. I also do not expect to be told every little thing they are thinking about doing with the cash. If you invest in a company you are putting your trust in the leadership and so far, Apple has proven they know what they are doing. For shareholders to randomly start demanding a dividend as you suggest is just irrational. Why at $100B? Why not at $80B? Why not at $40B? If they continue to generate sales and profits there is absolutely no reason to pay a dividend. Companies pay a dividend when the growth slows or stops so it can continue to offer a reason for investors to stay put. Apple is not there yet and as such the whining for a dividend should stop. If you still believe in Apple's management enough to be invested you should trust their decision making ability about what to do with its cash. I do.

  7. sgmsg | March 5, 2012

    "If I'm an Apple (Nasdaq: AAPL) Investor, I Want a Dividend"

    That's why you're not an Appl Investor.

  8. Bruce McMahon | March 5, 2012

    I am not a US tax expert, but I have read in several places that a significant amount of this cash is held offshore and that repatriating this money to the US to pay out as a dividend has serious adverse tax consquences.
    The above analysis, while it makes good sense, it fails to examine the subject matter from a tax perspective.
    I would love to hear from a US tax expert on this subject so that investors have ALL of the facts at their disposal before deciding on a strategy to start pushing Apple to pay a dividend.

  9. Jon Taylor | March 5, 2012

    "Simply put, a dividend is the best way for Apple shareholders to get real value out of their investment."

    Real value? My stock is up 315%, I'd consider the value of my stock doing just fine. It's hilarious to read all these so called experts claiming what Apple should do with their money. Apple is doing just fine without anyone's advice and I hope they only listen to themselves.

  10. arijit | March 5, 2012

    Yeh..I agree

  11. Jack | March 5, 2012

    "Those numbers are not just unsustainable, they are completely unsustainable. "

    Well, you are quite the wordsmith. Your ability to craft sentences of power and sway are matched only by the complexity of your imagination.

  12. Sy | March 5, 2012

    I am just amazed at the author's argument. He states "I'm neither a technology expert nor a fashion expert, but I would expect to see Apple's margins start eroding about two years from now. " But you are an expert in how to run Apple? Or that Apple management are going to all of a sudden do the opposite of everything Steve Jobs worked for, and just spend their cash horde on just anything?

    While Steve Jobs can't be replaced, he has proved that his business model of making the absolute best products you can, and controlling "the whole widget", is a good model. Apple's period before the second tenure of Steve Jobs was a model of what not to do. Apple management then followed the advice of analysts and MBA types, who said at various times that they should license the Mac OS (which they did, and it almost killed them), drop the Mac OS and license Windows (they didn't), and build cheap beige box computers to compete with Windows machines (they did).

    So I believe Apple has learned from their past mistakes, and the mistakes of successful companies in the past, and has a corporate culture and systems in place to keep things moving. Can they keep growing at this rate forever? Of course not. But until they stop growing, I don't want the dividend. My Apple stock went from 90 to over 500 in 5 years. That's way more than a dividend would pay me.

  13. ZZMike | March 5, 2012

    The traditional wisdom is that tech stocks and growth stocks don't pay dividends.

    I'd rather see a stock split – maybe even 3:1 – that would put it within reach of more investors.

  14. Bob Forsberg | March 5, 2012

    As an Apple shareholder since 1988, a $100,000 investment then has yielded me over $44,000,000 now. I've never sought a dividend, allowing the board and Steve Jobs leeway to manage funds for growth and product development. I'd suggest that same proven game plan remain.

  15. James | March 5, 2012

    Those of us who bought aapl at $17 know that the company's current glory is precisely because they did not pay a dividend. Reinvesting earnings affords aapl sustained growth at the lowest possible rates and the investor's value isn't lost.

    Buy in or get out.

  16. John | March 5, 2012

    There is a lot of speculation going on here.

    The only hard evidence we have is that gathered by Horace at Asymco. He shows that a dollar in retained cash drives about five dollars in share price. If this relation holds then a ten dollar a share dividend will result in a fifty dollar a share drop in share price. I am an investor and I'd rather have the higher share price.

  17. Anonymous | March 5, 2012

    Why would any Apple investor possibly want Apple to do anything other than what they would be doing? Moronic article.

  18. peter lobl | March 5, 2012

    Without information from Apple's board or at least more than blank supposition, where do you find the boldness to write, "However, the temptation of the $97.5 billion cash hoard would remain and management would still dream of the $100 billion acquisition that could revolutionize Apple's prospects. "

    such mind reading ability could certainly put to more constructive use on a game show, in the military, a circus carnival, or all 3 combined!

    stock advice or financial recommendations: nein danke!

  19. matt johnson | March 5, 2012

    You are simply clueless which was proven by your lack of fact and lying statement about our net president Romney

  20. NormM | March 5, 2012

    Apple has a small share in the markets it's making most of it's money on: cellphones and PC's (mostly as tablets). Thus it's momentum and growth there are likely to continue for several more years. It's biggest problems seem to be making its devices fast enough, and not having enough retail stores. I think it should spend its money on that.

    If Apple wants to diversify into streaming TV/movies on new devices, it needs to own/create more content, since existing owners are reluctant to let it have content. That's something else it could spend money on.

  21. NormM | March 5, 2012

    Apple has a small share in the markets it's making most of it's money on: cellphones and PC's (mostly as tablets). Thus its momentum and growth there are likely to continue for several more years. Its biggest problems seem to be making its devices fast enough, and not having enough retail stores. I think it should spend its money on that.

    If Apple wants to diversify into streaming TV/movies on new devices, it needs to own/create more content, since existing owners are reluctant to let it have content. That's something else it could spend money on.

  22. John | March 5, 2012

    Your not an Apple investor so no one cares.

  23. Donald Brown | March 5, 2012

    Yes, we know from bitter experience how disastrous diversification would be for Apple. We all remember the fiasco when Apple entered the MP3 player market. And who will forget the utter failure of Apple's attempt to enter the phone market. Clearly, Apple should be hamstrung and required to stay within its narrow area of expertise of making computers, even though you foresee dropping margins and profitability in its current business lines.

    May I point out one thing you don't seem to understand about why Apple has done well? You credit the design, but you then equate it with "fashion sense". Yes, Apple cares about making products that look good. Style does matter. (Fashion is of the moment, style is eternal.) But the focus on design starts at the beginning, making sure things work the way people would expect them to, from the moment they open the box. No, Apple doesn't always succeed, but their track record is impressive.

    And while Jobs was unique in his monomania towards his ideas of design, he didn't do the actual design work, and those engineers are still at Apple. When Jobs returned to Apple, this design-focused approach was untested, new, and Jobs had to push it through by weight of his personality. The management at Apple knows that it works, and isn't likely to abandon it.

    Does a regular dividend make sense? You could be right. Apple is a company with very healthy positive cash flow, and so returning some of it as a dividend directly to the investors makes sense. But deliberately kill the cash saved for future use? That only makes sense if you see no future for Apple, and then you might as well sell your shares and buy something you see a future in. It's not like there are so few people wanting to buy Apple stock that changing positions would result in a big loss.

  24. NITRAM | March 5, 2012

    Hahaha.. good one!

  25. KenC | March 5, 2012

    "it would be less likely to diversify unwisely in the future.

    By receiving such a dividend, Apple shareholders would find their capital value preserved and their income increased.

    However, the temptation of the $97.5 billion cash hoard would remain and management would still dream of the $100 billion acquisition that could revolutionize Apple's prospects. "

    When has Apple management ever shown a predisposition for wasting cash or dreaming about a big acquisition? In their deepest, darkest days, their largest purchase was NeXT, which cost them a little over $400M, and brought both the foundation for the Mac OS X and iOS as well as Steve Jobs back to Apple.

    "Sure Apple's design is excellent, superior even, but over time, as the unique fashion value of the Jobs/Apple combination fade, people will come to pay only modest premiums for superior design. "

    This presumes that you are right that Apple's secret sauce is in "fashion value", which it is not, and indicates that you really don't understand why people buy Apple products.

    "Well, I'm neither a technology expert nor a fashion expert, but I would expect to see Apple's margins start eroding about two years from now. "

    LOL, this should be self-explanatory why it's utter nonsense.

    "First, the company can remain within the product categories in which it has already succeeded.

    In that case, profit margins will decline to at most half their extraordinary current levels, while sales increase only gradually with the overall expansion of the market for those products. "

    Right, that's why Apple has been in the computer product category for 3 decades, and their margins have only increased, while growth has been beating the overall PC market for something like 25 quarters in a row.

    "But Apple's $97.5 billion in cash gives its management a second option.

    It can seek to expand through acquisition, moving into new product categories and expand margins in those products through applying Apple branding and design.

    We might see Apple flat-screen televisions, Apple digital watches, Apple home appliances, Apple handbags, Apple SUVs, Apple restaurants and maybe even Apple apples. "

    And, when has Apple shown an interest in anything other than organic growth? Perhaps, there's more than your two options to choose from.

  26. Will Woods | March 5, 2012

    Expecting, or requesting a special dividend of $100/share is extreme (19% dividend??). You predict that 2 years from now the unsustainability will finally catch up with Apple, as Steve's original product ideas are exhausted. Wouldn't it be responsible for Apple to keep more than just an emergency cash stock if they expect far less growth in 2 years? Using their hoard to consistently invest in new patents and technology is their way of sustaining such incredible growth. I trust the management to steer clear of throwing money away into such diverse product segments as you describe. Maintaining a higher amount of cash than their competition will certainly keep them ahead in the high-end segment, and dishing out $100/share is just asking way too much. As a shareholder I would be very happy to receive a special dividend of 5%… And, I would still feel confident that Apple will continue extraordinary growth for at least 2 years, as 5% is just pocket change, while 19% is suggesting that their growth has reached maturity.

  27. John Price | March 5, 2012

    I have invested in Apple and followed the stock daily for 10 years now. I'm sorry, Mr. Hutchinson, but your application of conventional wisdom and corporate strategy to Apple is naive and uninformed. Apple does need to pay a reasonable ongoing dividend and split the stock 5 for 1, but Apple has never expanded its markets by acquisition of other corporations and their stale products. They have made small strategic acquisitions of companies whose technologies fit well with products Apple was developing. Apple has never "remain[ed] within the product categories in which it has already succeeded". It has expanded by inventing new products and creating new markets, which others then slavishly copy. It will continue to do so. Apple's high margins are not due to "fashion". They are due to a philosophy of offering extremely high quality, easy to operate products at a price people find reasonable. Apple will never engage in the kind of price wars that have led other companies [Dell] to impending destruction. Apple is not Dell, Mr. Hutchinson. It is folly to invest as if it is.

  28. John Wilson | March 5, 2012

    Your premise is largely flawed because it makes the presumption that Apple is likely to make a dumb and expensive acquisition. Never in their history have they made a large (relative to companies their size) acquisition. They're biggest, I believe, was NeXT, which was instrumental to the Mac, followed by Anobit. (Unadjusted for inflation, which would make the NeXT deal even bigger.) Their acquisitions have always been aimed at incrementally adding value to the company's current products. They don't go for wild home runs; they go for singles and doubles. And they don't go for acquiring to add marketshare. They would rather innovate.

    It would be hard to find a company that has been more judicious in their use of cash than Apple. Tim Cook has been instrumental over the years in prepaying suppliers billions of dollars to secure enough parts of various products, thereby leaving the competition with lackluster supply. Even now, ultrabook makers aren't able to secure enough unibody aluminium and have turned to plastic instead. So asking for dividend based on possible future financial mismanagement is absurd.

  29. michael | March 5, 2012

    How about a little disclosure, Mr. Short?

    Complete unsubstantiated unoriginal blather.

    As a long-term Apple investor, I most certainly DO NOT want the company to disburse its war chest to the stockholders. They have yet to make an unwise use of the money, and there are plenty of good places to invest it in the future.

    Please, will you idiots shut up about the dividend, already?

  30. Al | March 5, 2012

    Why would you pay a tax? If you don't like AAPL's policy, (nor BRK) buy something else.

  31. Ian Eisenberg | March 5, 2012

    I AM an Apple shareholder. I have been for quite some time. Personally I am very happy with the way Apple has been conducting business and hope they continue on just as they have. It is clear that financial analysts have no clue as to what makes Apple a success and continue to try and make sense of it based on their own limited experiences.

  32. brad-t | March 5, 2012

    Do you know what a paragraph is?

  33. esacco | March 6, 2012

    What about taxes? To pay a dividend, I understand, most of the cash you are talking about in the article have to get back to the U.S. and consequently taxed. (They might be waiting for a tax holiday). And even in that case ruling out the possibility of stock buyback implies that the stock is fairly priced, or overvalued at the current market prices. What if the stock is undervalued? Wouldn't it be better to buyback stock in this case…

    Just some humble thoughts…

    Kind regards,

    EISP

  34. Alice Whaley | March 6, 2012

    I was under the impression that the #1 stock owned by governments is the Apple stock.
    Look up CAFR for the federal government, your state government, your city government,
    etc. I think you will find Apple stock. CAFR is the savings accounts for the various
    government bodies. You hear about the budget but never about their savings accounts.

    Until the government wants a dividend, there will be no dividend. They have the most
    stock.

  35. Jim Berry | March 6, 2012

    What a crock!

  36. Gunta Leona | March 7, 2012

    Manufactory need investors… I not to need…. My life changed one drunk, setting predatory family, work … Himself killed. Only in this world nobody helps, I guess all drunk. Not without talking about the end of the world. I for one do not have to sufferThe fact that the money needed to live rather than exist, drunk do not care.What happens if I say – send me 100 euros, it will get your 10 million dollars and will never get drunk? It's nothing. Ha. Gunta Leona

Leave a Reply

Your email address will not be published. Required fields are marked *


− 7 = two

Some HTML is OK