By Neal Frankle
Published in “Great Speculations,” Neal’s Forbes.com investing column
There are 917 million Apple shares owned by individuals, institutions and mutual funds. Chances are good that you own a few shares yourself. If so, you might be hoping that the stewards of the company declare and pay out a juicier dividend. I understand your sentiment but I suggest you reconsider your desire to drink from a cup that truly runneth over with cash–roughly $137 billion, or $146 per share.
Many shareholders are clamoring for the company to declare a fatter dividend or a special one to ease some of their pain. From a certain standpoint, David Einhorn of Greenlight Capital and others who want to tap into that cash do have a compelling argument. The company is sitting on a mountain of it. Why shouldn’t Apple CEO Tim Cook support paying out more of that green to shareholders?
Apple cut its first dividend checks in its modern era last August with a $2.65 payout. The dividend remained steady in November and February 2013, working out to an annual yield of 2.44%. That tops the 2% yield for the S&P 500, but it’s not particularly rich for a company with a huge cash stockpile that grows larger by the minute.
Some shareholders argue that the company should let the good times continue to roll and bump that dividend up even higher. This is likely to happen but I think it’s not a great idea.
The prime objective of a company’s management team is to enhance shareholder value. Apple’s management team is tasked with this same mission. Shareholder value is made up of appreciation and dividends to be sure, but CEO Cook needs to put a lot more attention on reversing the ugly share price story rather than worrying about bumping the dividend higher.
Apple has a pretty good record of successfully deploying capital. Return on assets over the past 12 months is 20.6% and return on equity is 38.4%. You may question the sustainability of those returns, but don’t count on them cratering.
Apple’s numbers right now are headed in the wrong direction. Consider earnings per share. Over the last three years the average EPS annual growth rate is 72%. But that growth has slowed to 14% (annualized) over the last three quarters and was barely positive at +0.1% in the final three months of 2012. The consensus forecast of analysts for the first quarter calls for EPS to drop 17% on a 9% increase in revenue compared to the first quarter of 2012. Annual sales growth has slipped from an average increase of 57% per year over the last 3 years to an increase of 18% annualized over the last quarter.
The positives here are big, including no debt, great return on invested capital and fantastic profit margins. This is the kind of company that needs to put the pedal to the medal and find ways to use their know how to deliver higher earnings, not one that should be in a hurry to shovel more cash out the door in dividend payouts. This would needlessly tie its hands in lean times. Mr. Einhorn should remember that Depression babies were stingy with money for a reason.
Apple spends a great deal of money on research and development already. It’s also true that it’s very hard to maintain the kind of returns they’ve experienced in the past. In fact, return on invested capital (ROIC) peaked in December 2011 at 47%, but it is still a stout 37%.
Other stocks like Amazon.com have done very well over the last 12 months despite far worse bottom lines. In the case of Amazon, the market is clearly saying they expect earnings to shape up sometime soon. If not, its stock price may fare even worse than Apple’s.
Apple is a unique company. You can’t really compare it to Blackberry because it does far more than make phones. It’s not just an electronics seller like Best Buy. And it’s not just a software maker like Microsoft .
I’m no investment banker, but consider what Apple might look like if it used a big chunk of that loot to buy a few high-growth tech companies and then used more money to develop gadgets to leverage those properties.
For example, LinkedIn has a market cap of about $20 billion. That means Apple could take less than 20% of their reserves and own one of the fastest growing companies on the planet. Unlike Apple, LinkedIn is growing like gangbusters. Its earnings exploded 192% last quarter and 168% over the last 3 quarters. What would happen if Apple bought LinkedIn (and 2 or 3 companies like it) and then developed apps for it that drove sales for more Apple products? This is just one example and I’m sure the brainiacs in Cupertino could come up with a long list of potential acquisition ideas.
The market for products might be mature right now. Somewhere down the road a new hot product will come along that we simply can’t do without. Apple is very good at finding these toys and bringing them to market. Right now, Apple needs to exploit the service side of technology in which it isn’t currently doing all that it could.
Apple’s shares have cratered because investors are worried. The company suffers from a dearth of new and exciting products, earnings are slowing and competition is rising. This is the time for Apple to put all hands on deck to put the fire out and put itself back on track. By brilliantly investing cash it can find profitable investments for shareholders that will push the stock price higher rather than giving them hush money.
Some investors argue that the board could actually invest more heavily and pay a higher dividend but that might prove difficult. While they are indeed sitting on a pile of cash, 70% of that money sits outside of the United States. Apple would incur a stinging income tax bite if it were to repatriate the money back to the U.S. in order to accomplish this.
If the dividend increased from 2.65% to 5% more investors might want the stock and that would drive the price up – for awhile. But long-term, this strategy isn’t going to put the company back on track. It’s hard to replace a unique individual like Steve Jobs but the company has to have a “Steve Jobs” mentality of thinking outside the box with research and acquisitions.
If you own Apple shares, where do you stand on this? Do you prefer a nice dividend check or do you want the company to invest that cash to deliver higher earnings?
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Neal Frankle is a Certified Financial Planner with more than 25 years of experience. He blogs regularly at his site, wealthpilgrim.com, and is a contributor to Forbes.com. To contact Neal, click here.
It’s not an either/or. We’ve been Apple shareholders since it was in double digits, and we’ve done a lot better from appreciation than we would have from dividends–even though we didn’t sell at 700, alas.
I’d love to know how much Tim Cook and team think they need in their growth fund, and how much they feel they can afford to distribute in dividends. Don’t forget that distributing dividends can actually boost the stock value.
Thanks Mike. I agree—-but most of that growth came BEFORE Apple paid out any dividend at all or when it was very tiny. And post dividend, the stock hasn’t done well at all. I believe most investors bought Apple for growth and if that growth isn’t there, the price will continue to dive.
Yikes! Your question may become moot. With Tim Cook’s revelations to the Senate today, you can just see them drooling with anticipation of getting their hands on some of those hidden billions through some kind of tax law change. Shareholders? Apple investment? Naw, the government will call dibs. And we know they will invest it much more wisely than Tim Cook or any of the rest of us could.