In my prior Seeking Alpha article, I predicted that Apple, Inc. (NASDAQ:AAPL) would announce a dividend contemporaneously with its earnings on Tuesday. Apple did not, and I was wrong. But the rationale for a one-time dividend is still intact.
Nothing has changed since earnings, except that my belief based on such earnings is even stronger now. Apple had blow-out earnings of $6.43 per share, while raising forward guidance to $4.90, handily above even the highest of analyst expectations. In addition, Apple generated operating cash of $9.8 billion, resulting in cash and marketable securities (taken together, "cash") of $59 billion, a number that will certainly rise by $3 billion to $5 billion more even with anticipated capital expenditures in the current quarter.
So what is Apple going to do with all of its cash? It has four options:
- Continue to hold it in the company's coffers while earning a measly rate of return, presumably around 1%, give or take.
- Authorize a minimum stock buyback of $20 billion over an extended time period, which would still leave it with $40 billion, regardless of the timing of stock purchases.
- Use the funds for strategic acquisitions of a size and type consistent with past practices.
- Declare a one-time dividend of up to $20 per share.
As stated, no matter what option or options Apple chooses, it will still be left holding at least $40 billion by the end of the quarter, with every expectation that cash reserves will continue to grow substantially by the end of the year. Consequently, even if Apple elects one or more of options 2 through 4 above, it is not going to deplete its cash reserves by a significant amount, and certainly not by an amount that would limit its strategic options.
Given a choice between a stock buyback and a dividend, I believe most shareholders would prefer the latter, especially since it is unclear, and more likely doubtful, that Apple's stock price is anywhere near full value for its cash as a component of its stock price/going-concern valuation.
For the valuation reason alone, a stock buyback would not likely have the intended effect of increasing share price based on increased earnings per share, based on the fact that fewer outstanding shares as a buyback ordinarily occurs over an extended time period.
By contrast, a dividend would convert to real cash value to shareholders immediately. For the same reason that it is unlikely that a stock buyback would have much effect on value (i.e. cash on hand if not fully reflected in Apple's share price currently), a one-time dividend, although having a very short-term downward effect on stock price, would unlikely have a lasting effect of suppressing the stock price. Moreover, by virtue of extension of the "Bush" tax cuts, qualified dividend income will still be taxed at 15% -- the same rate as a long-term capital gain.
With respect to strategic options, as the past few years demonstrate, Apple, whether wisely or not, has been very conservative in acquiring companies and certainly not at inflated prices. It is hard to even remember recent Apple acquisitions, because the purchase prices have been relatively immaterial from a cash perspective.
Given Apple's penchant for acquiring companies for a certain talent pool or a very specific technology, as well as Steve Jobs' medical leave, it is hard to conceive that Apple will change its investing style anytime soon and undertake a highly material acquisition.
So I return to the premise of my prior article: That a dividend should be announced promptly. Not only will it address the mounting questions from a chorus of shareholders about the appropriate uses of Apple's cash horde, but it will also send a strong signal that Jobs' on-site absence will have a minimal effect on Apple's continuing operations and performance (and, concomitantly, profitability), similar to his last leave of absence less than two years ago. It also would implicitly reaffirm Jobs' own vote of support for Tim Cook and the rest of the Apple management team. Stated differently, if the visionary leader (who will still play a active role in major strategic decisions) is comfortable with a dividend at this time, he must be quite comfortable and confident with the management team that he himself put together over the last five-to-10 years to manage Apple's business affairs, and most certainly through the remainder of 2011.
Finally, while Jobs is the visionary leader of Apple, his opposition to dividends in the past is no longer defensible at Apple's astronomical cash level. Jobs has always displayed a somewhat hostile attitude to dividends and outright disdain for "pleasing The Street." That being said, Apple is no longer in a hunker-down mentality, where its sheer existence was hanging in the balance. It should no longer act as such. And, it wouldn't hurt if its board of directors listened to reasonable concerns of shareholders for a change, instead of rubber-stamping Jobs on non-product development matters, including the proper use of Apple's clearly overabundant cash stash.
Disclosure: I am long AAPL.