Historically I haven’t been a fan of people saying that Apple (AAPL) should start paying dividends. I didn’t like it when Jon Fortt pushed it in 2007, and I didn’t like it when Arik Hesseldahl had the same idea in 2008. (Although by that point I did concede that “a modest dividend, tied to profits, makes perfect sense.”) Fast forward to 2012, however, and I think that Apple’s announcement is a perfectly sensible one, and if anything overdue.
The problem with most people asking for dividends and stock buybacks is that they generally have a pretty stupid argument, along the general lines of “If X declared a dividend, its stock would go up. Stocks going up are a good thing. Therefore, X should declare a dividend.”
That argument doesn’t even make much sense: if cash leaves the company and goes straight into shareholders’ pockets, the value of what’s left behind goes down, not up. If a company gives a bunch of money back to shareholders and its value goes up as a result, then it has much bigger problems than not paying dividends.
Apple’s stated reason to start paying dividends is simple: it has more money than it knows what to do with. Fortress balance sheets and strategic flexibility are all well and good, but there comes a point — around $100 billion, it would seem — at which you can buy anything you could conceivably desire, and still have more than enough money left over. So if Apple can’t use that money, give it back to shareholders, who surely can.
The stated reason for Apple’s stock buybacks makes perfect sense too. A large part of Apple employees’ compensation comes in the form of equity in general, and restricted stock units in particular. When those RSUs vest, all other shareholders get diluted. So to prevent that from happening, Apple’s going to buy back roughly as much stock as it’s issuing.
Now the kind of people who look at Apple as a stock first and as a company second are not going to be happy about this. And weirdly, leading that charge Monday is the Wall Street Journal, and its Marketplace editor Dennis Berman. Shortly after Apple’s dividend was announced, the flagship @WSJ Twitter account, with more than 1.5 million followers, told them all that “Apple’s cash pile exceeds the GDP of more than two-thirds of the world’s countries.” That’s a classic case of comparing apples with oranges: the cash pile is stock, while GDP is flow. And it’s exactly the kind of unhelpful and misleading statistic that the WSJ should be trying very hard to avoid.
Shortly afterwards, the same @WSJ account retweeted SmartMoney:
And the griping didn’t stop there.
It’s almost as if the WSJ doesn’t understand that Apple’s dividend yield is not under its control. Apple can set the level of its dividend; it can’t set the level of its share price. Is the WSJ really implying that Apple should wish for a lower share price, so that its dividend yield goes up? After all, at $10.60 per year, Apple’s dividend is fully 3% of where its stock was trading as recently as November. What’s more, at $9.9 billion per year, Apple’s dividend is very close to being the highest in the world. Here’s the league table, as of Friday:
|Company||Annual dividend |
|Exxon Mobil (XOM)||9.02|
|Royal Dutch Shell (RDS.A)||6.88|
|General Electric (GE)||6.46|
|Johnson & Johnson (JNJ)||6.16|
|Procter & Gamble (PG)||5.77|
If you look down this list, it’s not really the kind of company that Apple particularly wants to keep. AT&T is returning more than $10 billion a year to its shareholders; I’m sure that all of us who use its service could think of a few areas that money could easily be put to good use. And five of the top eight companies on this list are in the commodities business; the other three are telecoms. Not a single company on the list could realistically be considered a growth stock or a hotbed of innovation.
But the people who prefer financial engineering to, well, real engineering are never going to be happy with Apple’s conservatism. Dennis Berman made his own Cracker Barrel barb, and then followed up with this:
There is no reason for Apple to issue debt: companies issue debt when they can invest it and get a good return on their investment. But as we’ve seen from Apple’s cash pile, Apple has essentially nothing to invest in at all. So long as there’s a cash pile, issuing debt would only make that pile go up, rather than down, while forcing the company to pay interest for no good reason. Having a cash pile and issuing debt is a bit like having a CD and running a balance on your credit card: idiotic.
And Berman’s wrong if he really thinks that Apple could issue debt cheaper than the US government. Companies which can borrow more cheaply than the US government are a bit like those faster-than-the-speed-of-light subatomic particles: if you look more closely, they turn out not to exist after all. The US Treasury can borrow more cheaply than anybody else just because the US Treasury market is much more liquid than the market in any other fixed-income name. Which in turn is a function of the fact that there are $11 trillion of Treasury bonds outstanding. I think we can safely say that Apple’s never going to borrow anything near that much money.
Now Apple could, if it wanted, declare a monster special dividend, get rid of all its cash, borrow lots of money, use that money to buy back stock, and generally lever up in the name of financial engineering. That would be rather worrisome, I think, to the vast majority of Apple’s shareholders — and it would certainly be worrisome to any potential buyers of Apple’s bonds. Basically, Apple has two choices when it comes to debt. It can issue debt while it’s already sitting on lots of cash, which is redundant and stupid. Or it can get rid of all its cash before it issues debt, in which case it could no longer borrow at ultra-cheap rates, and it would lose a lot of strategic flexibility at the same time.
So well done to Tim Cook for announcing a sensible dividend at a sensible time, when Apple’s throwing off enormous amounts of cash and there’s nothing obvious to spend the money on. And well done too for ignoring the noise coming from the financial media, who think that his company is simply a stock price. It isn’t, and I sincerely hope Apple never ends up that way.