Any article on Apple (AAPL) is sure to evoke a strong reaction. I suspect that this one will as well. My reason for writing it is simple. I am strongly advocating the idea that Apple's Board and senior management declare the company's first dividend and commit to a permanent quarterly distribution of a reasonable portion of its cash-flow to its owners, the shareholders.
I am far from the first to take this position and there is a better-than-even chance that Apple will ignore this request, as they have others. Many shareholders will also be unsupportive of this notion. But I cannot help myself. I am an income investor. I do not own Apple but I would like to. I will stick with my discipline as I have done for years.
Despite some concerns I have about Apple, along with general concerns about a lot of things these days, I believe Apple is a terrific company, perhaps one of the greatest in the history of the United States, or the world for that matter. It is rare that a single enterprise transcends business success and transforms a culture, and indeed the world.
That said, I would respectfully like to lay out what I believe is a very compelling case for a dividend declaration by Apple. It is all in the numbers. For your consideration, I offer the following:
Apple Select Financial Metrics
(Four Quarters Ending As Shown)
|Source-Apple Quarterly Filings|
What is apparent from the balance sheet figures summarized above is the strong cash build Apple enjoys from year to year. I thought it was useful to examine three successive years of asset growth, particularly as the September 2009 figures reflect the challenge of the Financial Crisis of 2008/2009. I also included detail on R&D, since that line-item is so often cited by growth advocates as critical to building optimal shareholder value. We can clearly see that Apple's R&D expense, while formidable, only uses a fraction of its net cash-flow. When share-based compensation is stripped out, the cash needs are even less.
After R&D, the only possible uses for free cash-flow are share buybacks, acquisitions, investment in plant and equipment, hiring, or hoarding. It is clear that Apple's free cash-flow, even through challenging economic circumstances, continues to accumulate on its balance sheet. Given the potential investment uses, especially in the current extremely low interest rate environment, it is highly unlikely the company can generate any meaningful returns on its growing cash hoard. A share buyback program near the all-time highs certainly doesn't seem to make any sense.
Apple's management and its board have been notoriously, and in my view correctly, reluctant to be enticed by acquisitions constantly 'suggested' by Wall Street bankers. Perhaps the folks in charge at Apple remember Peter Lynch's famous quote: "Companies that use free cash-flow to acquire other companies rarely succeed in such endeavors". Or it could be the observation of the experience of their peers, such as Microsoft (MSFT) and Cisco (CSCO), doing exactly what Mr. Lynch warned of, failing to make acquisitions work. At least Microsoft finally succumbed to the pressures and pays a regular dividend. Partially due to the acquisitions Mr. Chambers was constantly chasing, Cisco really cannot pay much of a sustainable dividend at the moment. A good lesson in the perils of listening to Wall Street 'advice'.
As can be seen from these figures, Apple can easily afford to pay a substantial dividend. An annual dividend of $12/share would yield over 3% and would use approximately $11.153 billion. Having accrued over $30 billion from its incredible success in the past four quarters, a dividend payout rate of 30-35% would not strap the company in any conceivable way.
As cash continues to build, it acts as more and more of a drag on Apple's valuation. Shareholders are undoubtedly currently suffering from this drag effect to some degree. A payout would have the additional benefit of allowing long-term investors to engage in a dividend re-investment program and allow owners to access the magic of compounding for themselves and the generations to come. This has exponential benefits over time. If prices fall, still more shares are added and compounding is enhanced. A great deal of wealth has historically been built this way, despite protestations in many quarters of the so called "Wealth Managemnt" Industry.
From my perspective, it is very hard to see a downside to Apple declaring a dividend as soon as possible. How about Q1 2012? As Nike would say, Just Do It!!