Apple: Why Won't They Pay Dividends?


on February 27 2012 8:34 AM
Would You Trust an Apple ‘iBank’ With All Your Money?
Would You Trust an Apple ‘iBank’ With All Your Money? REUTERS

Apple Inc. (NASDAQ: AAPL), the iconic technological behemoth and wildly successful iPad and iPhone maker, again refrained from announcing that the company will start paying dividends, despite a huge amount of cash on its balance sheet and clamor from some stockholders.

International Business Times spoke with three experts about Apple's recalcitrance to pay out dividends.

Michael Yoshikami is chief executive and chairman of Destination Wealth Management in Walnut Creek, Calif.

Michael McGervey is president of McGervey Wealth Management in North Canton, Ohio.

Anna N. Danielova, Ph. D., is assistant professor of finance at the DeGroote School of Business in Hamilton, Ont.

IB TIMES: Is it unusual that Apple pays no dividends?

DANIELOVA: No, about 70 percent of firms or more do not pay dividends. Among those are high-growth companies which choose not to pay dividends for the following reasons: they need to finance their growth and internally-generated earnings are cheaper, so all generated earnings are reinvested back; and their shares are presumably mostly held by investors who prefer capital gains over dividends.

IB TIMES: Apple has something like $98 billion in cash on its balance sheet. Why did they choose not to pay a dividend?

YOSHIKAMI: The company is very cautious about spending cash as they clearly remember the days when they needed to forge a partnership with Microsoft (NASDAQ: MSFT) in order to continue their operations. However, I do believe that the comments made by management suggest that in the next quarter dividends will be paid.

IB TIMES: Do you agree with Apple's decision not to pay dividends now? McGERVEY:Apple's decision not to offer a dividend will provide the best value for their undistributed cash. With Apple's upside potential and market penetration (with the prospects of higher global penetration), investing its resources into obtaining content for iTunes, improving upon the TV and movie streaming offerings of Netflix, and building a subscription a la carte offering may be in the best interest of shareholders. Furthermore, with the likelihood of qualified dividends being subject to new tax laws on the horizon, it could discourage regular investors.

IB TIMES: Why did Apple chief executive Tim Cook not decide to enact a stock split? Wouldn’t that make shares more affordable to the average investor, thereby bringing in a whole new batch of happy investors?

DANIELOVA: I can only speculate that Apple thinks that their stock price, now around $520, is still within the boundaries of price levels of similar firms in the industry – Google's (NASDAQ: GOOG) price is around $600. Alternatively, perhaps they are motivated by the same reasons that prevented Berkshire Hathaway (NYSE: BRK.A) from splitting their stock for the past several decades, whatever that reason was. YOSHIKAMI: Certainly a stock split would make the stock more appealing to a broader range of investors. But frankly, the stock is already in demand even at a $520 share price and the related administrative costs are probably not worth the irritation. McGERVEY: Tim Cook gave careful consideration to the split. Most splits do not do much of anything -- other than cause an initial pop in the price which eventually finds its way back to its pre-split equivalent price. As to the stock being more affordable to the average investor, this idea has some merit; however, there are many more substantial shareholders that may face higher transactional costs due to more shares being required to trade the same dollar amount.

IB TIMES: With a market cap of $450 billion, is Apple a “mature” company (i.e., the type that normally pays dividends)? Or is their growth rate still so high, that they could still be considered an “evolving” firm that doesn't feel compelled to pay out dividends? DANIELOVA: There is more to dividend policy than just market cap. Once dividends are set they have to be maintained at least on the same level. The market on average penalizes the decreases in dividends four times as much as it rewards increases. As long as a company generates stable cash flow, dividends are feasible. But it does not mean that they are the first best way of returning cash to shareholders. If managers have a history of not wasting cash on unprofitable projects, those managers should not be constrained in their decision- making process by paying out regular dividends, because the “next great idea” may be around the corner. In addition, if firms do not want to deal with the transaction costs of issuing additional equity or debt, they would like to preserve all the extra cash. Also, companies in certain industries tend to provide higher dividend yields than companies in other sectors. For example, utilities and basic materials companies tend to consistently pay good dividend yields. High tech firms tend to not pay dividends or pay small ones. Finally, at this point, even given its size, I would not call Apple a “mature” firm. They managed to reinvent themselves in late 1990s. YOSHIKAMI: Apple is not considered a mature company in the industry that they are part of. In a rapidly evolving sector it's important for companies to maintain flexibility – these might very well be the reasons why companies are deciding to hold onto a significant cash position. McGERVEY: Apple is a mature company with the potential of a growth company with new and innovative offerings. I have confidence that Apple will put its cash to good use. They will maintain a high growth stature with their momentum and current market penetration. There is opportunity for significant increased market penetration globally in China and Latin America, plus other untapped markets that Apple is exploring.

IB TIMES: Tim Cook even admitted Apple has “more than we need to run a company.” If they don't pay dividends, how else might they deploy this mountain of cash? YOSHIKAMI: If the company does not pay dividends, they could use cash to buy back shares. However, I suspect this will not be the choice made as shares valued at $500 may be more expensive than Apple would like. Of course, they could acquire other companies but Apple has shown an unwillingness to make large acquisitions and instead make more strategic smaller purchases that have less risk and add features to their products. Apple management is very conservative and I don't believe they would be willing to take on risk of making large acquisitions. DANIELOVA: Apple could make some share repurchases. This should provide additional “kick” to the stock price. They could also pay out a special dividend once or twice. This way cash is distributed back to shareholders without any commitments to pay out fixed dividends. M&A is another way to maintain growth, if internal growth slows down. Given the dynamics of the industry, finding the strategically right acquisition becomes very important.

IB TIMES: Paying a dividend usually gives a stock a spike in price. But does such an act provide stocks with long-term price appreciation? [For example, ever since Microsoft started paying dividends, their stock has gone nowhere]. YOSHIKAMI: Dividends typically imply growth rates are slow. But Apple continues to sell huge volumes of product across the globe. Microsoft is an example of a mature company and that's one of the reasons this stock has struggled. They're looking to find the next growth industry and have so far not been able to replicate the success they enjoyed with operating systems and office products. DANIELOVA: Microsoft started paying dividends only in 2003, starting with a modest 8-cent payout. Microsoft is an example of a pure growth company, which has matured and become an “income” stock. Apple would think twice before projecting this type of image.

IB TIMES: Do most Apple investors not care about getting a dividend since they're enjoying such large price gains as it is? DANIELOVA: In the United States, dividends are taxed at a higher rate than capital gains, so a tax-minded stockholder would most likely prefer not to receive dividends in lieu of capital gains. Apple most likely caters to these stockholders and keeps earnings to finance further growth and continue to be a high growth technology firm. McGERVEY: Most shareholders base their purchase of Apple on its upside potential, market share, executive decision-making, and untapped markets -- not its dividend. This can be demonstrated by the price action before and shortly after it was clear that the dividend would not be offered (i.e., no significant change).

IB TIMES: Is Apple avoiding paying dividends since so much of their cash is held overseas in foreign subsidiaries? (Since, they'd be subject to exorbitant tax liabilities once the cash is repatriated to the U.S.?) YOSHIKAMI: This is an interesting point and does underscore some of the hesitation that Apple has about paying a dividend. DANIELOVA: I doubt that. Nowadays it is hard to find a U.S. firm that does not have cash flows coming from foreign subsidiaries. Even if this is a consideration, this is most likely a second-degree issue for them.

IB TIMES: Any final thoughts? McGERVEY: Apple's cash position puts them in a position of strength. As they develop new opportunities and explore new markets, their choices become much more abundant when sitting on almost $100 billion in cash. Shareholders should embrace this fact. Apple's use of capital through reinvestment, or M&A is a more efficient use of cash, ultimately rewarding the shareholder with greater potential for price appreciation than the (after-tax) dividend. DANIELOVA: I do not expect Apple to start paying a regular dividend. In a hypothetical scenario if they start, most likely they would test the waters with a very small one, not to scare away those capital gains-oriented investors.