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Steve Jobs Puts His Foot Down on Dividends

A week ago, I chastised three companies for not paying dividends. Though Google (Nasdaq: GOOG  ) and WellPoint were two of them, readers seemed to zero in on my calling out Apple (Nasdaq: AAPL  ) for its lack of shareholder generosity.

My plan was to leave well enough alone. That is, until Apple CEO Steve Jobs made it a point to stomp on the idea of a dividend at the company's annual meeting.

As Bloomberg reported:

Apple Inc. Chief Executive Officer Steve Jobs said he prefers holding on to the company's cash hoard for potential acquisitions and "bold" investments, rather than paying dividends or buying back stock.

To which I say: Well of course he prefers holding onto tons of cash, it makes his job a heck of a lot easier! But that doesn't mean that it's good in any way for shareholders.

The merits of a cash mountain
Many of the commenters on my previous article argued that there are very good reasons for Apple to hang onto a ton of cash. Chief among them was the idea that an ultraconservative balance sheet would give the company a cushion in case competition started encroaching or a major recession hit.

Some also pointed out the same reason that Jobs did -- the ability to innovate and make acquisitions.

And the idea of keeping so much cash on the balance sheet isn't something totally unheard of. As a few commenters highlighted, Warren Buffett had a ton of cash on Berkshire Hathaway's (NYSE: BRK-A) balance sheet before gorging on the Burlington Northern Santa Fe acquisition. And as my fellow Fool Morgan Housel mentioned to me yesterday, Bill Gates attributed part of his success at Microsoft (Nasdaq: MSFT  ) to having an ultraconservative balance sheet.

Point, meet counterpoint
But if you ask me, all of this is simply corporate sleight of hand by Apple attempting to convince shareholders that something that looks and smells like a cow pie is, in fact, something other than a cow pie.

Specifically, here's why the cited reasons for hanging onto so much cash make no sense:

1. Acquisitions and "bold" investments: There are companies that have created formidable businesses on the back of an unending campaign of acquisitions. In the tech world, you don't have to look further than Cisco (Nasdaq: CSCO  ) and Oracle (Nasdaq: ORCL  ) for examples of how well acquisitions can work out.

But Apple has little experience making acquisitions (it's made only 10 small ones over the past decade, according to Capital IQ), and the annals of stock market history are littered with examples of companies that have destroyed tons of shareholder value by trying to make some sort of massive "game-changing" acquisition (cough, Time Warner (NYSE: TWX  ) , cough).

The idea of Apple spending a ton of cash on some organic innovative effort doesn't do anything for me, either. Considering that Apple amassed this cash hoard while developing some of the most important gadgets of the decade, an innovative push that involves spending anything close to $40 billion sounds like a boondoggle.

2. Buffett and Gates: Very simply, Apple is no Berkshire and Jobs is no Buffett. I don't mean that in a disparaging way; it's just a simple fact that the two businesses are vastly different. Value creation for Buffett is making investments and acquisitions, while for Jobs it's creating innovative products. Comparing the dividend policies of the two is like comparing apples and Dilly Bars.

And as far as Microsoft goes, I'm sure that an ultraconservative balance sheet helped Gates sleep well at night. However, I think the company's success had a lot more to do with Gates' vision of the future of computing and his hard-driving efforts to make Microsoft the standard. Similarly, Apple is going to live and die on its vision and execution, not its insistence on depriving shareholders of the spoils of victory.

3. Be prepared for competition and the next big recession: This is perhaps the argument that confuses me the most. Supposedly, the $40 billion in cash and investments that is collecting dust on Apple's balance sheet should stay put so that the company will have plenty of dry powder to fight off competition and survive the next big recession.

Taken alone, the argument isn't all that ludicrous. However, if investors really believe this then they seem to be a bit confused.

Analysts currently estimate that Apple will grow its earnings in excess of 18% per year over the next five years. This would mean that Apple would report net income of roughly $21 billion for calendar year 2014. By bidding up shares to a price-to-earnings ratio of nearly 20, investors seem to think that this is a pretty believable scenario.

So what gives? Is Apple a company that will face such staggering challenges that it will need $40 billion in cash and investments to keep its head above water? Or is it an unbeatable innovator that will more than double its earnings over the next half-decade?

If it's the former, investors may want to think again about paying such a lofty price for Apple shares. If it's the latter, it seems like there will be so much cash coming Apple's way that introducing a dividend wouldn't hamper the company in the least.

But you've heard more than enough from me about Apple and its hoard. Let me know what you think. Take the poll below and then head down to the comments section to defend your call.

Berkshire Hathaway, Microsoft, and WellPoint are Motley Fool Inside Value recommendations. Google is a Rule Breakers choice. Apple and Berkshire Hathaway are Stock Advisor recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway and Oracle. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants ...

Read/Post Comments (13) | Recommend This Article (12)

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 February 26, 2010, at 2:05 PM, dargus wrote:

    One vote, 100%. Listen to me, I'm important!

  • Report this Comment On February 26, 2010, at 2:16 PM, BadCopNoDonuts wrote:

    Apple is no Google, that's for sure. The Ipad is just the beginning of a slow decline for them. And I'm a lifelong Mac fan and user (always will be).

    But as an investor, I wouldn't touch them at current prices, and I view the hoarding of cash with no dividends as basically a "screw you" to investors. It really is an indication of what Jobs thinks of his stock holders.

  • Report this Comment On February 26, 2010, at 5:42 PM, PositiveMojo wrote:

    I agree with Jobs. The market is still pretty uncertain. Many companies are undervalued and there may be some opportunity. How about Palm? They may also have some new innovation that needs some cash thrown at it. Remember that Apple DOES NOT have market share with the OS. Their strength is their innovation and sometimes that requires cash.

  • Report this Comment On February 26, 2010, at 8:18 PM, MrViklund wrote:

    I will keep this clean but I don't get why people want Apple to pay out it's cash. Having ALLOT of cash is always good. Besides, it's all that cash + growth that supports Apple's share price which at 200 dollar is very undervalued in my opinion. If Apple were to pay out cash, the stock would eventually go much much lower. I don't think people think about that.

  • Report this Comment On February 26, 2010, at 11:09 PM, gregmrobb wrote:

    Thank the gods that Apple had a good stash of cash in the 80's recession. They were on the ropes... Steve brought them back. This recession, Apple opened stores and ramped up their retail channels all over the world while real estate cost was down. Apple will buy CBS, NOK and some more eClouds to round out their product offerings. Besides, the iTransport thing will cost a bundle to develop.

  • Report this Comment On February 27, 2010, at 10:08 AM, ConstableOdo wrote:

    I hope that Apple is holding onto that money so it can do some outrageous buyout of some new technology company or create a WIMAX/LTE infrastructure in larger cities.

  • Report this Comment On February 27, 2010, at 11:26 AM, tgnytg wrote:

    When Apple starts paying a dividend, the cash distributed will devalue their shares. Wishing for a dividend is wishing that the share price will drop.

    All of the investing analysts have said for decades that Apple is doomed: AAPL needs a dividend or a split, the iPhone will fail, the iPod will fail, retail stores will fail, Apple needs netbooks, Jobs' illness will make the stock tank, etc., etc.

    You geniuses keep whining. I don't have time for crying, I'm too busy counting my AAPL profits.

  • Report this Comment On March 01, 2010, at 6:11 PM, TMFKopp wrote:

    @ MrViklund and tgnytg

    Yes, Apple's share price would drop if it paid a dividend, just as every dividend-paying stock drops on the ex-dividend date. But that delta doesn't just disappear into thin air -- what comes off the share price has gone into your portfolio in the form of cash.

    The difference between the two is that when the share price is propped up by the cash, that cash is sitting on the balance sheet earning <2%, but if it's paid out to you, you could find a place to invest it where it could be earning you a heck of a lot more than 2%.

    And for everyone else that's hoping for Apple to make some sort of huge acquisition with its cash, I would strongly encourage you to take a look back at a history of major mergers. For the most part, major "game changing" or "transformative" M&A activity has destroyed shareholder value.

    Actually, now that I think about it... if making a big acquisition that would benefit shareholders was the name of the game, why was Apple sitting on its hands during the worst of the recession? It could have put that cash to work on severely undervalued companies. Or perhaps it's just waiting for a time when everything seems A-OK, valuations are full, and it can pay a tremendous premium for a hot company.

    Apple shareholders deserve better.


  • Report this Comment On March 01, 2010, at 11:32 PM, rlcato wrote:

    @ TMFKopp:

    'And for everyone else that's hoping for Apple to make some sort of huge acquisition with its cash, I would strongly encourage you to take a look back at a history of major mergers. For the most part, major "game changing" or "transformative" M&A activity has destroyed shareholder value.'

    So I guess a couple of Apple's 'game changes' may 'destroyed shareholder value'; the acquisition of low-power chip designer PA Semi sounds like it's introducing that 'system-on-a-chip' (Apple chip) that's been bantered around the IT community for forever-and-a-day; and the one BIG game changing acquisition of them all: FingerWorks in 2005. Just as the name implies, look at what influenced 'smart-phones' now. If Apple keep making those type of acquisitions while sitting on a pile of cash then what could possibly be next. You know Apple spends a lot on R&D into the things they do. As an example, their products influenced many car companies to install connectors in cars to accommodate Apple products.

    Apple shareholders deserve better? How much better? A bit of change in the pocket to invest? Rubbish. I wish I had shares in Apple. Compare some of the similar commercial tech giants and see where they're at in the same time frame while handing out dividends.

  • Report this Comment On March 01, 2010, at 11:36 PM, rlcato wrote:

    Did this Post?

  • Report this Comment On March 02, 2010, at 4:04 PM, gt1135 wrote:

    @ricato: My magic 8-ball says 'Maybe'

    As for this article...

    Apple is making tons of cash, yes. They got that way by being the underdog with the Mac and by great new innovations with the iPod & iPhone. Now they are the big dog and everybody is trying to knock them off. It takes a lot more to stay on top once you're there and they've got some very stiff competition in their age old foe Microsoft, and now with Google attacking from all angles. Its hard to count on continually coming up with new innnovations. To draw back to the Warren Buffett & Berkshire comparisons in the article, the reason they bought Burlington Northern is because they are too big to play the smaller markets and are no longer as nimble as before. Many companies have the same issue when they get so big. Its hard to be as nimble as they were when they were smaller. Sometimes buying out somebody elses tech is easier than developing it yourself and hoping it catches hold.

  • Report this Comment On March 02, 2010, at 4:32 PM, CMFStan8331 wrote:

    Apple should begin paying at least a small dividend. No company can grow to infinity, and Apple is already getting fairly large. However, the real test of whether Apple's stand against paying dividends is wise will be the share price of the stock. For as long as Apple can keep conquering new markets and continue its rapid growth, shareholders will not be dumping their shares en masse to protest the lack of a dividend. If and when growth slows significantly and Apple can't figure out how to use that cash to re-energize it, the multiple folks are willing to pay for the stock will fall and the dividend question might be viewed differently at Apple HQ. For the time-being, Apple's growth prospects still look good enough to justify the no-dividend stance.

  • Report this Comment On May 21, 2010, at 7:35 PM, cornbread415 wrote:

    Keep in mind, Apple nearly went bankrupt in the late '90s. I can understand why they'd be conservative with their cash. What's more, that hoard will add an easy $800 million to their profits this year.

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