Weighing Both Sides: Pros And Cons Of An Apple Dividend

| About: Apple Inc. (AAPL)

Yes, this is another Article about Apple's (NASDAQ:AAPL) cash hoard. The shareholders meeting on February 23rd arrived and departed with $98B intact. There have been some really good articles/comments on Seeking Alpha about the event as well as what Apple should or should not do with its cash.

This "devil's advocate" article tries to present the views of both the "pro" and "anti" Apple dividend teams, so people get the entire picture. Sit back and enjoy the article, while keeping in mind it's a "for fun" piece. As always, feel free to contribute positively to the discussions by adding your own pros and cons.


More investors: Some institutions as well as individuals have a rule/habit of buying only dividend paying stocks. Few even have a rule of a 3% and 4% yield level. Even a small yield would give the dividend investors a feeling that the company is more "shareholder friendly". Read this piece on what a dividend could do to an "under owned" stock.

Stabilize the stock: Even the biggest Apple fans will admit the stock has been treated more like a day trading stock and not as an investment or an asset class. Issuing a dividend could stabilize the stock and reduce the volatility. If the stock gets knocked down big by one institution, the other who loves to pick up bargain dividend stocks would step in. Jason Schwarz coined the term "Apple Slingshot" to define how the hedge funds pull the stock down so they could get back on board and ride it all the way up. It's hard to imagine a dividend paying stock get treated that way.

End of PE compression: As strange as it sounds, Apple's PE is still less than 15 as of this writing. Another stock we own, Philip Morris (NYSE:PM) is trading at a PE of 17. A tobacco stock is expected to grow earnings faster than the tech juggernaut? While comparing a staple and tech company may not be so prudent, those PE numbers say investors would be willing to pay a higher price for a growth stock that pays a dividend as well.

Takes off the distraction/Cash is not "idle": No one can deny that the question of dividend has been one of the hottest topics with respect to Apple. If Apple decides to pay even a small dividend, it takes the company's (you can't deny Tim Cook and Co. are actually putting time and effort into the discussion) and investor's focus away from the topic. While the entire $98B is not actually dollar bills sitting around, investors would feel more at ease that the company is not putting the cash to sleep.


End of growth? The pure growth investors will not welcome the move, as history suggests a tech company paying a dividend marks the end of its exponential growth. Critics argue Microsoft's (NASDAQ:MSFT) one time dividend of $3 in 2004 as well as its regular dividend program has not taken the stock price anywhere, which might be a bad thing to say given the stock's recent surge.

Repatriation Tax: A lot of Apple investors forget the fact that a majority of Apple's cash hoard stays outside the United States and Uncle Sam would take a huge bite of it if the cash comes home. Apple could rather spend that money on international expansion. A counterpoint would be that Apple can easily pay the dividends using the cash in US as well as future earnings.

Future acquisitions and legal defense: The consumer tech industry is no stranger to competition and lawsuits. While $98B (plus add the future dollars) is indeed too big an amount to talk about acquisitions, it's still a safe cushion for Apple to have. And who would want to go toe to toe on legal issues with a company having such a cash hoard. Though some might laugh it off, who knows how tough a competition Windows 8 or the next Apple is going to be?

A change from the culture: A lot of Apple fans believe it's not in Apple's blood to pay dividends and that the company should maintain its unique "culture". Yes, Apple paid dividends till Steve Jobs came back in late 1990s but people see his return to the company then as the day today's Apple began its journey. Getting away from the Steve Jobs culture would sound like a bad news to the long time Apple holders.


My Take

Just leave Apple alone as long as it's shattering all estimates, price targets and keeps up its growth. Yes, dividends are nice and we have some good dividend paying stocks in our portfolios. But why bother a consumer tech juggernaut about its cash hoard when it's doing just fine. Remember, do not fix what isn't broken. There will most likely be a stage where Apple realizes it cannot grow as fast, which will be the stage the company needs to unleash its cash to reward its loyal shareholders and differentiate itself from its peers. However, there are just too many growth catalysts in the short term to medium like iPad3, iPhone5 and China expansion to be bothered about a dividend. Longer term, there are the iTV rumors, further global expansion and may be the next "one more thing".

Disclosure: I am long AAPL, PM.