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.
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.
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.
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:
