Leave Apple's Billions Alone

Everyone is bent on giving Apple's (Nasdaq: AAPL  ) money away these days.

Bernstein Research got heads nodding last week when analyst Toni Sacconaghi urged the company to initiate a dividend, ideally saddled with an ambitious share buyback.

I don't have to travel far to find someone swinging a stick at Apple's balance sheet pinata this week. Motley Fool Income Investor advisor James Early is renewing the popular chant for Apple to yield more than just great products.

Apple has $45.8 billion cash and marketable securities, so it's easy to view Apple's top-heavy balance sheet with the eyes of a kid in a candy store.

Unfortunately, investors are forgetting a few things.

1. You can't buy pride, but you can give it away.
Sacconaghi has a bold plan. His open letter calls for a spunky $30 billion share repurchase plan. He also proposed dividends at an annualized 4% rate; that wouldn't get in the way of Apple's cash balance because it would represent only a fraction of the cash flow it is currently generating.

Let's take a closer look at the proposed buyback. Whether Apple invests $30 billion to eat its own shares or heeds others calling for a chunky one-time payout for the same amount, Apple's market cap could shrink by roughly $30 billion with either fewer shares outstanding or in the act of going ex-dividend.

Remember when Apple topped Microsoft (Nasdaq: MSFT  ) in terms of market cap earlier this year? That situation could reverse. Apple's unspoken quest to overtake ExxonMobil (NYSE: XOM  ) as our country's most valuable company by market capitalization would become that much harder.

Buyback fans can argue that the accretive move would lead to a higher share price as earnings are divided among fewer shares. It's a logical conclusion, but the larger cry appears to be for a market cap-deflating dividend push.

2. One-time ransoms are for quitters.
You know who wears the "I paid a special one-time dividend" badge? Losers, mostly. Recent slackers that have gone that route include goth retailer Hot Topic (Nasdaq: HOTT  ) and meandering GPS has-been Garmin (Nasdaq: GRMN  ) .

Does Apple want to run with that crowd?

Let's bring this closer to home. Microsoft paid a special $3-a-share dividend in 2004. Its stock was in the high $20s then. It's in the mid-$20s today. Gee, that really helped unlock shareholder value. Apple's stock has appreciated several times over in that time.

If one-time payouts are to catch on, they're going to need better role models.

3. Apple may still need the money.
It's true that Apple hasn't had much of an acquisitive appetite in the past. It's also true that Apple is unlikely to come into a greenback-slurping funk in the near term. However, you never know when an arms race is going to kick off.

Who are Apple's biggest adversaries these days? I would probably go with Microsoft and Google (Nasdaq: GOOG  ) . Each of those companies has more than $30 billion in cash and equivalents on its balance sheet.

Why should Apple be the one to blink first? What if Apple cracked open the vault, only to have Google and Microsoft go on spending sprees?

4. Today's tech leaders aren't conventional.
As companies mature, a dividend is a natural way to replace growth investors with income-chasing shareholders bent on value.

Well, that's the way the companies in your father's portfolio went about their life stages. But Apple, Google, and priceline.com (Nasdaq: PCLN  ) aren't playing by conventional standards. They're not going to pay out dividends just because they're making a lot more money than they're consuming. They don't split their shares just because they're trading well into the triple digits.

Leave Apple's billions alone. If you're buying into Steve Jobs' company, it better be because you think that he can make more sense of the company's greenery than you.

Please take our Motley Poll then scroll down to share your opinion in the comments section.

Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Apple and priceline.com are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of ExxonMobil and Google. Try any of our Foolish newsletters today, free for 30 days

Longtime Fool contributor Rick Munarriz is not about to tell Apple what to do with its money, given the success Apple has been having on its own in recent years. He does not own shares in any of the stocks in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy, and it knows that roaming charges weren't billed in one day.


Read/Post Comments (9) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2010, at 8:26 PM, Henry3Dogg wrote:

    Damn Right!

  • Report this Comment On August 17, 2010, at 9:29 PM, dstb wrote:

    "Buyback fans can argue that the accretive move would lead to a higher share price as earnings are divided among fewer shares. It's a logical conclusion, but the larger cry appears to be for a market cap-deflating dividend push."

    The market clearly is not giving Apple's cash hoard much value as it stands right now. Just because they pay a dividend does not mean the share price will subsequently fall. The market does not believe Apple can do anything useful with the cash. Therefore, if they pay a dividdend it should help the stock price.

  • Report this Comment On August 17, 2010, at 10:45 PM, 13astion wrote:

    dstb, I disagree. People trade risk. The "knowns" are yesterday's trades. Once Apple "dispenses" with the cash, there is no more mystery, nobody trying to trade the upside or downside of a particular potentiality. Less volatility means less interest, less interest means less news, less trading, and ultimately less value.

    Nope, Apple should just keep the money right where it is and continue to drive up the suspense. Call it the "Moonlighting Factor": nobody likes the romantic tension once it had "paid off". As it is with Apple's cash cache.

  • Report this Comment On August 17, 2010, at 11:31 PM, millsbob wrote:

    i'll wager that the people calling for Apple to pay a dividend are the same ones saying Apple was dead in 1998.

    as a shareholder, i think Steve et al are smarter than the commentators.

    i'm actually pretty happy with what they've been doing for the past 5 years, and i can't imagine a shareholder for that period who isn't.

  • Report this Comment On August 18, 2010, at 6:19 AM, ConstableOdo wrote:

    I want to see a large acquisition that would give Apple access to the corporate world. As a shareholder, I think that Steve is smarter than Tony S. Maybe a lot of that money might be necessary for a huge expansion into China. I'm willing to believe anything that Steve says about holding onto that $46 billion war chest of cash.

  • Report this Comment On August 18, 2010, at 9:20 AM, DJspicks wrote:

    I'm an Apple shareholder and could care less about the market cap argument. I am concerned about the under use of capital on the balance sheet. That being said, I have confidence that Apple's management and Board will appropriately use this capital over time. Acquisition targets may become less expensive in the next year and they may unleash that capital to acquire companies with great technologies at attractive prices. At the time I bought Apple shares, I new they did not pay a dividend and did not expect them to. The stock has performed great and with taxes on dividends likely to increase, I'll take share price appreciation over dividends.

  • Report this Comment On August 18, 2010, at 9:20 AM, DJspicks wrote:

    knew

  • Report this Comment On August 19, 2010, at 1:48 PM, rfaramir wrote:

    Share buybacks are stock price manipulations that high-ups advocate when their options are under water. Apple should NOT want to go there.

    A dividend, on the other hand, would begin Apple's mainstreaming. They can handle it, now that they're no longer on death's door (haven't been for years, but perception takes a while to change) and have a good constant revenue stream. It also would promote better management once the Steve leaves someday.

  • Report this Comment On August 20, 2010, at 11:08 AM, Buzzy43 wrote:

    There is no chance that Jobs will make a huge corporate acquisition. Integrating aapl culture on a huge scale would take their eye off the ball in a way that is not characteristic of Jobs. After aapl's experience in the 90s when software companies, like Adobe, thumbed their nose at appl and developed Mac programs that were lower quality, or developed slowly or not at all, Jobs has sought independence from hardware and software suppliers. This goes for financing independence as well. He is prepared for a rainy day, which will come in some form at some point.

    I think the day in 1997 when he introduced Gates on a jumbo screen at an aapl meeting to announce MS equity investment in aapl and a continuation of Office development to stabilize aapl, Jobs vowed in his mind to go forward with an eye toward not depending on anyone, thus the stores, thus the no licensing of the operating system thus the development of their own chips- the list goes on.

    Bernstein Research analyst Toni Sacconaghi has a remarkably poor history on aapl, just look back at his attempt to accuse aapl of stuffing sellers with iPhone inventory in Feb 08 to hide low sales. This was poor work performance on his part and it appears to have had no chastening effect on on his subsequent utterances. I really do not understand how he remains covering aapl at Bernstein. It really calls into question all of their opinions in my mind.

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