I remember my 8 year old son crying his head off when I chose not to buy him an iPod nano after his sister got one for her birthday. He said "but she got one and I have my own money to buy it - it is my money!"
Now, what does this story have to do with AAPL?
Given AAPL's growing cash hoard and a PE that doesn't seem to grow past the puberty stage (in numeric terms), it is isn't a surprise to see more articles about what AAPL should do with its cash.
This article isn't about suggesting what AAPL should do with its cash; instead, it is about WHY AAPL should stay the course and stick to its plan.
From its recent Q3 2011 results, AAPL has $76B in cash; given today's share price of $373 ($346B market cap), it represents approximately 22% of its market cap. To put things in perspective, that pile of cash could buy (assuming no premium) DELL ($28B), RIMM ($12B) and NOK ($20B) and they will still have enough cash left to buy NFLX ($12B)!
Before I provide my opinion on why AAPL should stay the course, it is important to first postulate what "type" of shareholders/analyst would be calling for how AAPL should use its cash.
(1) The "entitled" ones - simply, these shareholders feel that they are entitled to the cash hoard and it should be paid out to them. They usually would resort to terms like "AAPL isn't shareholder friendly" or "it is our money too!."
(2) The "enlightened" ones - simply, these shareholders feel they have better ideas to manage the company better. The cash balance (as it may not be earning a high rate of return), when unused, should be returned to the shareholders before management makes any stupid mistakes and blow it away. While a lot of them have well meaning intentions; most of them are just armchair quarterbacks who are looking for a quick ride as the share price isn't moving as quickly as it could for them.
(3) The 'Paris Hilton wannabe's" - they are in it purely for the cash. They know AAPL doesn't pay any dividends; yet, they still buy the stock with the hopes that it will pay one day. They see the growing cash as a pot of gold and would logically surmise...if MSFT paid dividends...why can't AAPL?
From an academic point of view, I'm sure you could find papers to support the argument of how well dividend paying stocks perform over time. There are also a lot of brilliant minds postulating about the pro's and con's of paying (or not paying) dividends. Those topics are not in scope for this article.
However, what I could not find was an emprical study on how well dividend paying technology stocks perform over time. More specifically, how well do large cap dividend paying technology stocks perform over time. If someone can find one, mea maxima culpa.
Since I like things that are simple...here is a list of technology stocks that currently pay dividends:
click to enlarge
Please note that I do realize that XOM isn't a tech company; I merely included it there for perspective as it is the largest company in terms of market cap right now. Also, please note that despite carrying that much cash on its balance sheet, AAPL continues to deliver top notch results in the ROA, ROE and ROI metrics.
Sticking with my "simple" theme, the chart below illustrates each stock's performance over time (specifically from the March 2009 lows). I arbitrarily picked that date; any further would have only served to magnify my conclusion.
From the information above, I can logically surmise that:
- Paying dividends (in AAPL's case) isn't necessary to outperform its peers or the general market.
- Tech companies that pay dividends do not necessarily perform any better than non dividend paying tech companies.
The chart below shows an interesting story. Given the recent market chaos, one would expect that the yields would at least "cushion" the fall. Granted, this is only over the last 10 trading days...I found it interesting enough to share.
As far as the suggestion that AAPL should use its cash to pay dividends in other to have a better stock retun; if the stats above doesn't convince you that it is not necessary, nothing will.
What about share buybacks?
I am of the opinion that share buybacks may not have the desired effect depending on "intention". Having spent my entire career in the financial industry, it has allowed me to see astute companies in action over time.
Let us take the case of Citigroup (C). Over the past decade, it must have spent over $30B in share buybacks. What transpired after the market tanked was ironic - not only did they have to get bailed out by the government in the tune of about $40B; its stock also dropped to below $3!
Opposite to Citigroups's debacle was TD Waterhouse's IPO. The bank clearly didn't need the money; it was purely done to monetize and capture the fad during the dot com era. It turned out to be the biggest short sale done by an institution that I can ever recall; they bought all the share back at peanut pricing and threw Waterhouse back into the company! People seemed to have forgotten and forgiven them for pulling such a despicable feat!
What can we expect AAPL to do with its cash going forward?
No buybacks and no dividends. Nothing of that sort to prop up the stock. AAPL should be left alone to manage its cash that way it sees fit. If I had a wish list, it would be to spend it on:
1. Continuing to strengthen its ecosystem.
2. Its retail sales force; they are the "face" of the company. They should feel that AAPL is the best place to work for and best place to deal with when it comes to technology companies.
3. Strengthening its core IP portfolio.
4. Strategic acquisitions (not buying/overpaying for the sake of acquiring). Funny enough, my son was commenting on how it should be an iPad on the dashboard to replace the GPS, CD and Sirius features.
AAPL management has proven over time that it is a responsible steward of the company's finances and have rewarded loyal shareholders with respectable returns over time. While past results does not guarantee future results, we should at least cut them some slack that they know what they are doing. If they were merely interested in cashing out on their stock options and move on; the easiest way to do this would be to split the stock 1 for 10. Their interests are aligned with shareholders.
"When you hire really good people you have to give them a piece of the business and let them run with it. That doesn’t mean I don’t get to kibitz a lot. But the reason you’re hiring them is because you’re going to give them the reins. I want [them] making as good or better decisions than I would. So the way to do that is to have them know everything, not just in their part of the business, but in every part of the business.”
Steve Jobs, Fortune, Feb 2008, in Kona, Hawaii
From an anecdotal perspective, what is an article about AAPL without Steve? Let's not forget that no one can ever imagine the pains he went thru when he lost control of AAPL over 20 years ago. Aside from being a creative genius; I don't think people give him enough credit for being a great strategic thinker and a very disciplined manager.
Having cash provides comfort and knowledge that you have some control over your destiny. If the recent US debt debacle does not strike home the value of "savings" and the danger of debt (despite the nation's ability to print money); you won't understand the value of cash to AAPL or Steve.
Remember this chart from my previous article?
If the adoption trend of its new products as shown above continues; there will be no reason to believe that AAPL's ability to generate cash will slow down. Let's take the iPad2 for example. Can you imagine going to school and all your books/materials were loaded in it? iPad will change the publishing industry like it did the music industry.
Now, going back to my nano story... my son had to wait longer but he ended up with a shiny new iTouch. With glee in his eyes, he looked at me and said "thank you" for making me understand the hard way that you said "no" because you knew something better was coming out.
Now, he's got his sights on an iPhone (with the same logical arguments). On that note, I don't expect the cry for AAPL's cash trove to stop anytime soon.
Disclosure: I am long AAPL.
Additional disclosure: Short RIMM and NFLX; can and will close this at any given point in time.