Why doesn’t Apple pay a dividend?

  @Gooch700 on January 07 2011 5:03 PM

Steve Jobs has long resisted the urge to dip into Apple Inc.’s (Nasdaq: AAPL) huge treasure chest of cash and pay out dividends. Given how Apple shares have sailed into the stratosphere, supported by wildly successful product launches (thereby making lots of happy investors); the company is unlikely to hand out dividends for the foreseeable future.

When asked about why the company pays no dividends, Jobs has repeatedly stated that the huge cash hoard represents a kind of security blanket for Apple -- a quick and easy way to make acquisitions (should the need arise) and/or develop new products through long-term R&D projects.

“We know if we need to acquire something, a piece of the puzzle to make something big and bold, we can write a check for it and not borrow a lot of money and put our whole company at risk, Jobs once said.

The cash in the bank gives us tremendous security and flexibility.

Indeed, when Jobs returned to the company in the spring of 1997, Apple was reportedly on the brink of bankruptcy. Perhaps he remembers those dark days very well.

Moreover, paying dividends represents a sea-change in the perception of a company – namely, that it has “matured” and will not grow much anymore (think of the tired old utility companies).

Clearly, this is not an image that Apple has for itself, nor do its shareholders, who are obviously thrilled by the rapid growth the company has enjoyed and will likely continue to enjoy (particularly as the vast Chinese market becomes more penetrated).

Perhaps a comparison to one of Apple’s major rivals Microsoft (NYSE: MSFT) is apropos.

At one time, Microsoft had almost $60-billion of cash on the balance sheet, from which they used about $32-billion to make a special one-time dividend (in 2004). Just late last year, Microsoft raised its dividend by 23 percent to $0.16 per share.

However, a quick glance at Microsoft’s stock chart reveals that its share price has gone nowhere in ten years. Not even a number of stock buybacks have helped push up the stock price.

Microsoft probably wishes it had held onto that multi-billion dollar largesse.

Another tech giant, Cisco Systems (Nasdaq: CSCO) has also succumbed to stockholder pressure and announced it will start paying a dividend before July.

However, Cisco’s shares have plunged from almost $70 in spring of 2000 (when the tech bubble popped) to just above $20 now (meaning the company has lots of disgruntled investors on its hands).

Meanwhile, since April 2003, Apple shares have rocketed from just above $7 per share to more than $333 currently, making it the world’s second largest company behind Exxon-Mobil (NYSE: XOM) – moreover, robust sales and growth expectations may pave the way for further substantial share price gains.

Simply put, Apple has no pressing need now to pay dividends as all parts of the company is running at full-throttle.

E. Michael McGervey, president of McGervey Wealth Management in North Canton, Ohio, said that investors are not necessarily drawn to dividend-payers, especially when one gets huge stock price appreciation as one does with Apple.

“Investors would much rather have the company reinvest its money back into own operations,” he said.

Howard Silverblatt, senior index analyst at S&P, noted that while Apple’s current cash position and earnings appear to support a cash payment, they have decided not to pay one due to management decisions.

“That said, Apple also plays it close to vest, meaning they don’t telegraph their intentions, and have demonstrated an ability to make unexpected dramatic moves,” he said. “Will they pay? I hope so, but there are no hints of it yet.”

Meanwhile, many analysts expect the company’s next earnings report (due January 18) to be another record-breaker. There is also much excitement over plans to put Apple’s iPhone on the Verizon network, as well a new version of the iPad. Not to mention, the continued huge popularity of iPad, iPhone, and Mac will be sure to make investors happy.

In fact, one analyst recently lamented that Apple may even be undervalued and that the market doesn’t give it the “respect” it is due.

Yair Reiner, senior analyst at Oppenheimer & Co. wrote in a research note that the market “typically grants companies with 70 percent [earnings per share] growth and plenty of runway a premium valuation. [However], Apple is valued at [only] 14x (excluding cash) -- like the S&P.

One perhaps overlooked aspect of Apple’s refusal to pay dividends has to do with the fact that a large portion of the company’s cash is located overseas. According to a recent 10-K filing, more than 50 percent of Apple’s cash, cash equivalents and marketable securities are held by foreign subsidiaries.

This money is “subject to U.S. income taxation on repatriation to the U.S.” – another reason not to hand out dividends.

According to press reports, it is estimated that the company would be on the hook for more than $5-bilion in U.S. taxes if it tried to repatriate this foreign-held cash for a dividend payment.

So, if any Apple shareholders are disappointed that their company isn’t paying any dividends, perhaps they should cash out their holdings and buy some Microsoft and Cisco stock.

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