On Apple's $40 billion, and the question of dividends
AAPL has been hitting new highs just about every day. Yesterday the stock price hit an intra-day high of $230.20, a lofty height indeed. We pointed out earlier that Apple now has the fourth largest market cap of any publicly traded domestic company, so maybe it's time to revisit the question of Apple declaring dividends on its stock.
Apple has not declared a dividend since December of 1995. After the last shareholder meeting, Steve Jobs stated that the money was best left in the bank so there would be no question of loans if something big was to be bought. "The cash in the bank gives us tremendous flexibility," explained Steve.
The Motley Fool makes an interesting case in favor of dividends. Apple has no history of massive acquisitions, and keeping $40 billion around for just that reason sounds less than reasonable. A case is also made for keeping the money as preparation for the next big recession. This doesn't seem to hold much water, however, since analysts predict that Apple will grow by 18% per year for the next five years. That should provide more than enough cash, predicting that Apple will report net income of around $21 billion in 2014.
Of course, predictions are often wrong, but Apple has been excellent when it comes to beating expected earnings numbers for some time. 77% of informal Motley Fool poll respondents think that Apple should declare dividends. After all, that cash is really owned by the stockholders and it seems that a good number of them would like to get some of it back.
Read on for another view.
Some contrary opinions were voiced on CNN Money. One reason cited for issuing no dividends is to keep the Apple legal war chest fat, since Apple has a history of being litigious. That seems reasonable, but then again, $40 billion is well over the amount Apple would need to pay for endless lawyers.
With huge amounts of cash at its disposal, Apple can tie up the best component prices. Due to the success of the iPod and iPhone, Apple has become the biggest customer for flash memory in the industry, and to get the best prices the company often pre-pays vendors, as it did with Samsung last summer with a half billion dollar order. Another reason is real estate: Apple has spoken about building a second Cupertino campus which, if it happens, won't be cheap. Also not cheap is the plan to open 25 stores in China over the next two years along with the other stores planned around the world.
As a long time AAPL owner, my take on it is fairly simple: If it ain't broke, don't fix it. Not declaring a dividend certainly hasn't hurt Apple one bit. It sure hasn't restrained investors from buying the stock, and so issuing dividends doesn't seem to be an incentive for getting the stock sold. But the worst reason I can think of for declaring dividends is that that by doing so, the value of my stock will be diluted, thereby making it worth less. It is true that after a dividend, everyone still owns the same percentage of the company they started with, but that percentage is worth less.
I bought AAPL when dividends were declared, but that didn't enter into my decision to buy. When dividend distribution was stopped, it didn't faze me one bit, since I bought for growth, not periodic income, and that strategy has paid off handsomely. If Steve and the board feel more comfortable rolling around in money, that's just fine with me. I don't see any positive outcome of declaring dividends at this point. If you see differently, please let us know in the comments.
