Why Apple Doesn't Need a Dividend

| About: Apple Inc. (AAPL)

One important trait investors look for in a company is a constant dividend. A dividend is essentially the part of a companies' cash flow that is given back to investors. A continuous quarterly dividend is more often than not a sign that a company is doing well, since it shows the company has continuously been bringing in a surplus of cash. Two examples of companies with continuous dividends are Caterpillar (CAT) and Bank of America (NYSE:BAC). This is a good time to note that investing in a company purely because they have a dividend is not a good idea. Many companies that give dividends end up doing worse because investors see that the company is giving out money that they are not making back in profits.

One top notch company that has not had a cash dividend since 1995 is Apple (AAPL). Yet Apple has one of the largest cash inventories in the world at about $65.8 billion. This brings a question to the table: Why does Apple not offer a dividend to investors? The answer is not easy, but the answer I came up with is that Apple has not finished expanding the company to their satisfaction. Therefore the cash flow that is considered a "surplus" is actually money that will be reinvested back into the company to continually innovate and create new products. However, it must be noted that Apple has not disclosed anything about using the money for expansion proposals.

Apple's Cloud

The first innovation Apple may be working on is joining the cloud computing network. For those of you who do not know what cloud computing is I will first give a basic explanation of what cloud computing is. Cloud computing basically means that you can access secure information from any computer in the world. A more precise definition can be found via EMC (EMC):

Cloud Computing leverages the efficient pooling of on-demand, self-managed virtual infrastructure to create a shared resource that is consumed as a service. This model creates convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort or service provider interaction.

As previously mentioned, Apple may have signed a deal to buy 12 petabytes of cloud storage from EMC's wholly owned subsidiary Isilon. This would be a substantial deal for EMC as well as Isilon. It must be noted that Apple has not stated anything about this deal, therefore, as of now, it is purely circumstantial. Nevertheless, the thinking behind putting iTunes on the cloud network would be to allow individuals the ability to access their own iTunes accounts and stream their own videos from any computer; which has always been a problem with iTunes. If Apple is planning to set up iTunes on the cloud network, it will be another step in the right direction for Apple to further control the mixed media market. However, in order for Apple to complete this they will need a small chunk of their cash flow, which means less for investors when a dividend becomes active.

According to a friend of mine, Arash Shahabi, who has worked on cloud computing for years and currently works for Microsoft (NASDAQ:MSFT), the cost of 12 petabytes is dependent upon the company and engineer hired for the job. My source stated that the price for 1 petabyte is roughly $75,000 for the hard drive and another $10,000 for the fans and support systems. After the basic components are bought, Apple would have to hire an engineer to design the project and set it up, which is about $30,000 for one petabyte. This is not factoring into account the price for the electricity, space and insurance needed to run the machines. He also mentioned that the experience of the electrical engineer hired can change the price substantially. For instance, an engineer just starting out may only get paid $30,000 for one petabyte of work, while a much more experienced engineer may get near $100,000 for that same job. As you can see the price could easily reach near $3 million just to set up the cloud computer. Not to mention the price for this amount of work goes up at an almost exponential rate, therefore to install the cloud systems Apple would be looking at, on the conservative side, roughly $2-$4 million for 12 petabytes of cloud space.

Paying that money to investors via a dividend would not be the best option for the company. Granted, even if the price for the cloud components reaches $4 million, that will only be 0.006% of Apple's current cash on hand. With that said, if Apple adds this innovation to their portfolio of products, investors will be very happy in the long run. Also, I would not be surprised if this supposed 12 petabytes of storage is just a test phase to see if it will work with iTunes. And if the test is successful then they will buy more cloud space for future expansion of the company. Assuming Apple is planning to put iTunes on the cloud network; it would be a better way to spend the extra cash instead of a dividend because the cloud network will indirectly bring more revenue. This shows that Apple may have greater projects on the horizon; which would cycle through to more revenue for the company as new cutting edge products hit the market. Not only would the higher revenue lead to a higher share price, assuming costs of new products are reasonable. Also, the more revenue would allow Apple to begin a dividend when they are finished with expansions.

On the one hand Apple could be planning to put iTunes on the cloud network, while on the other hand they may be setting up a cloud domain for other purposes. This domain could be used for a number of things; one could be iTunes, another use may be to allow users the ability to stream music and video from their own iTunes account via a website if you are using a computer without iTunes installed, or it could be used for something completely different. Whichever the case Apple may or may not have purchased a cloud domain, called iCloud.com, from Xcerion for $4.5 million. This would be a great innovation for Apple because it would not only speed up iTunes, but it would also allow users to have many more access points for mixed media. However, this report seems circumstantial as of now since the proof is based on a "source in the position to know." If this story is true, then this domain purchase would be only a minor dent to Apple's cash. This discussion about Apple's cloud plans make it clear that Apple has plans to spend their surplus on the company and let investors reap the benefits via the share price.

Apple Television

Another project Apple might be spending their cash flow on is Apple Smart TV and Apple HDTV screen displays. As with the above speculations, these two projects are also currently rumors as well. However, just as the other two these rumors have evidence. The thought behind Apple Smart TV is the same thought that is behind the Genius button on iTunes. Which means that the television could suggest other movies and shows you may be interested in. Another feature of Apple TV could be the ability to play your movies from your iPad or iPhone directly on your television; which would work better if Apple has these set up on the cloud network. Or even possibly allow users to buy movies from iTunes from their TV.

If Apple allows users to do that then other companies, such as Netflix (NASDAQ:NFLX), should feel very nervous. This type of Apple TV would go hand in hand with setting up iTunes on the cloud network since it would allow users to download movies on their computer, and play them on their television. Of course, testing for Apple TV would not be cheap, and production of these new televisions would be costly as well. This is where having the extra cash flow is essential. Since Apple is not giving out dividends, they will be able to use the current cash to create products that will bring in more money, such as Apple TV. Which means that patient investors might get a dividend when Apple decides they are done expanding their technology.

Apple HDTV, on the other hand, is a High Definition (HD) screen that is supposedly going to be applied onto the iPhone, iPad, and most likely the Smart TV if it does exist. Apple already uses HD screens on there products, but we will see companies continue to find more pristine, and more clear screens to put on their devices. Expect the new screens to be outfitted on the iPhone 5 later this year. This may be a reason the iPhone 5 will be released later than expected. According to the report above on Apple HDTV, they spent $3.9 billion dollars for the displays. Another note to make about this is that Apple has not stated they spent that money on displays; therefore this is just circumstantial. Also, it must be noted that we do not know how much product $3.9 billion bought, therefore more money may be needed. Nevertheless the $3.9 billion investment into the company is another way that Apple is spending their money instead of activating a dividend. Investors of Apple should not be concerned about this since it will bring in more cash for the company in the long run.

The amount of cash needed to supply the projects I mentioned is a mere $3.908 billion. However, this does not account for the building that will need to be purchased, or rented, to house the large cloud system for all this to even happen. Also, if Apple wants to make televisions they will need a manufacturing facility to do so; unless they plan to partner with another company. Even though these projects may not dent Apple's surplus, if something goes wrong and they have to cut one of the projects, then we could see a trickle down effect that could hurt their cloud computing dreams altogether. Luckily for Apple investors this will not happen, barring a catastrophe, and the company will continue to grow based on the fact that they will continually produce new products.

This leads back to the dividend question, which was: Why does Apple not offer a dividend for investors? As I have shown Apple is using this cash flow that could easily be offered to investors, to create totally new products that will not only bring in more revenue for Apple, but bring down the revenue of competitors. In a sense one could say Apple is attempting take over the mixed media world. Because Apple is still creating new product lines, I do not expect them to use their current cash for dividends any time soon. Eventually Apple will repay investors for their loyalty. Not only will they be able to offer a dividend, but they will be able to offer a substantial dividend since their cash flow increases every quarter. As long term Apple investors have seen, Apple is one company that keeps producing year in and year out.

Disclosure: I am long EMC, CAT.