Earlier this week, Apple (AAPL) declared its first dividend since 1995. The markets welcomed the news with open arms, not to mention with a 15-plus point rally, to send the stock soaring to its first close over $600 per share. It seems as if all is good with the Cupertino-based behemoth. Now, I must confess, I am an Apple junkie. I do believe that the company has mastered the art of vertical integration combined with an elegant eco-system. Apple has learned to program intuition into its devices better than anyone you could dare call competition. That said, I am a bit disappointed in what I see as a cheap (to the tune of just under $10 billion) public relations campaign, or what I call the completely unnecessary dividend.
Apple has become the powerhouse that it is based on many things, but off the top of my head, I will say innovation and vision. By innovation, I mean that Apple has built what the rest of the industry tries to copy. By vision, I mean that they are not going to ask me what to do before they do it. In other words, there was a plan before me, and some very smart people though it was good enough to not let the general public screw it up. I respect that.
The dividend, however, flies in the face of all things Apple. It represents a caving in to popular demand (I mean, who really didn’t think the dividend was coming?). It’s as if the company forgot that at $600 per share, the type of investor that can afford a significant number of Apple shares in their portfolio is precisely one that understands how dividends actually work. Let me illustrate…
Apple declared a quarterly dividend of $2.65 per share. Assuming a share price of $600, this represents an annual yield of just under 1.8 percent. This is on par with what I would receive on a 10-year government bond. The difference is that the principal value of my bond investment cannot drop.
Of course, investors buy Apple for the growth potential. No one buys Apple for cash flow. That would be the equivalent of buying the state of Florida so that you can get free fresh-squeezed orange juice every morning. And while using Apple for cash flow seems like a silly idea, here’s what really bugs me:
What is the upside to the shareholders?
Here’s what I mean: Let’s round the dividend to 2 percent of the stock price just to keep the math easy. Then, all Apple is doing is giving me 2 percent of my investment back each year. This is equivalent to me selling 2 shares of Apple stock per year for every 100 shares I bought. The only difference is that in the latter case, I decide when to cash out. In the former case, Apple decides. And here, I thought I was the investor!
Of course, let’s not forget where the money comes from – it comes from the hoard of cash that Apple has. Yes, the same hoard of cash that we point to every time as a partial justification of why Apple is worth $600 per share.
So, now Apple is giving out 2 percent of its share value by way of the cash. Any math majors out there? What happens when a company gives you 2 percent of its value? Answer: The company’s value drops by 2 percent! Yes. All else equal, if Apple gives away 2 percent of what it is worth, it is going to be worth 2 percent less than if it had not given money away.
Of course, the company expects (and its investors expect) that they will grow at a rate that far exceeds that 2 percent. In a nutshell, they are saying, “Here’s some money. It’s clear that we don’t need it.”
Call me old-fashioned, but I fail to see how I can do a better job of making money than Apple can. After all, they are the richest, most successful company in the world, and I’m not. Furthermore, just because you can afford to do something, that doesn’t mean it’s a good idea. I’ve seen worthless companies bought out for tens of millions of dollars, where the acquiring company shamelessly states, “well, that was just a drop in the bucket for us.” These are the same folks that when presented with the good fortune of being able to buy a $10-bill for $8, they turn around and sell it for $9 and claim to have made a profit.
In all, I don’t see how this is a good idea. Investors like the whole of Apple, not just 98 percent of it. They feel that Apple is more innovative than the next best alternative. Otherwise, investors would put their money in that next best alternative. So count me in the group that is less than impressed with this whole dividend idea.
If I can point to a silver lining in all of this is that Apple tends to get things right, and while this may not be what I would want, there’s that overwhelming sense that pretty soon it may be. Apple has built an empire through giving customers what they want before they know it. I mean, who knew that a giant iPhone without the phone part would be such a big hit (yes, I’m getting a new iPad as soon as I don’t have to wait in line). As the great Henry Ford stated, “If I asked people what they wanted, they would have said a faster horse.” So, although I question this latest decision by Apple, history is not on my side, and I can see myself eating every one of these words if the mighty giant continues its meteoric rise.