Does Apple Care About You?

Do you really think Steve Jobs cares about the individual shareholder?

It's common knowledge that Apple (Nasdaq: AAPL  ) doesn't pay a dividend despite sitting on one of the largest cash hoards in business today. OK, Berkshire Hathaway never paid a dividend, either, because Warren Buffett knows he can provide better shareholder returns on the money by reinvesting it into his business, mostly by large acquisitions. Fine -- perhaps The Steve intends to someday make a big, splashy purchase that requires more than $25 billion in the bank -- but I wouldn't know because he's not telling.

But wait -- there's more!
Unless you're the kind of financial gumshoe who likes to dive into cash-flow statements, it may surprise you when I say that Apple hasn't bought back a single share of stock since 2003, and even then it was a token buyback that still left Apple with more shares outstanding at the end of the year than at the beginning. The lack of buybacks and continuing stock-based compensation have created a situation where Apple's shares outstanding have increased by 28% since the end of fiscal 2000. This is not a shareholder-friendly way to manage your shares, especially when they've proved to have been consistently undervalued the entire decade and Apple didn't otherwise use its cash on any acquisitions.

You might think Jobs would be motivated to reward shareholders because he is one, but his stake in Walt Disney (NYSE: DIS  ) is actually three times as large as the $1.7 billion he holds in Apple stock. And he won't have too much pressure from fellow Apple directors or managers to become shareholder-friendly, either: Less than 1% of Apple's shares are owned by insiders.

By way of comparison, fellow tech titan IBM (NYSE: IBM  ) has reduced its share count by 30% over the past decade, thereby boosting earnings per share by 43%. Moreover, a small but stable dividend provided additional returns over the period as well. Of course, Big Blue's total returns have been decidedly less exciting than Apple's, but the key highlight here is that Big Blue maximized its potential for shareholders in that period.

Yeah but Apple is winning, dude!
Here's where you and I might diverge, dear reader. Because while the general investing sentiment on Apple is that it'll continue hitting the ball out of the park, I'm far more skeptical. The legion of raving Apple fanatics who profess their love for every Cupertino trinket is still growing, even if the product line is becoming more and more homogenized -- just put your iPod Touch, iPhone, and iPad side by side to see what I mean. Apple reinvented itself with the first iPod, and everything since has been a refinement or variation of that idea. How much further can you take the iOS platform -- replacing Mac OS X or running it on blimp-mounted Jumbotrons, maybe -- before the engine runs out of steam? It wouldn't be much of a stretch to put the iPhone software on the redesigned Macbook Air, now, would it?

It's at this point that Apple could regret not buying back shares while cash sits idle. Could you imagine Apple's share price if it had been more aggressive about actually using its cash to rebuy shares as its fortunes swung? More importantly, by the time Apple starts engaging in shareholder-friendly actions like rebuying shares, will the growth have sputtered out and it'll be overpaying for a plodding computing giant?

That happened to Microsoft (Nasdaq: MSFT  ) nearly eight years ago, and now Mr. Softy is more of an income stock than a growth story. Cisco Systems (Nasdaq: CSCO  ) arguably ran out of organic growth years ago but at least puts its cash to active use by way of acquisitions (though some would question the wisdom of recent purchases). IBM is doing all three -- buybacks, acquisitions, and dividends. And yes, I am suggesting that Apple should be more like boring old Big Blue sooner than later.

Denial ain't just a river
Apple is acting as if it was still a young and fresh business, but actually it's milking a basic idea that's getting long in the tooth. But consumers are still buying the "fresh" message, and investors don't mind at all. Almost a year ago, I posited that 2010 might be the year when the gravy train derails either because Steve's playbook runs out of gimme plays or because his customers would start to see that they're still basically buying the same old iPods with new bells and whistles and wrapped in a prettier case. Well, neither doomsday scenario has happened yet, and Apple's stock has treated its owners quite nicely in spite of dilution and a lack of breaking the mold past what iOS offers. And no, I don't think nice design counts as innovation (but I still watch Project Runway). I mean, it's seen as innovation that Apple might be thinking about selling iPhones in Verizon (NYSE: VZ  ) stores next year. It doesn't take much, does it?

Will 2011 be the year when Apple hits the wall and is forced to grow up? Will the joyride last into 2012? Whatever -- the change will come, and investors will feel the pain of Apple's previous shareholder-unfriendly mentality. With share prices soaring, the company has had little incentive to care about more shareholder-friendly uses of its cash, and the market will surely take it as a sign of weakness if or when the current investor policies change. It's a more mature business model than you'd think, but management seems to be in denial about that fact.

This is why I'm not willing to risk my hard-earned dollars on buying Apple stock. Not until the transformation happens, anyway. Take a look at Microsoft's full-history stock chart and its 9,550% returns in the 1990s, followed by severely negative returns ever since. Past results are no indication of future returns, as that chart clearly shows. Have you forgotten that buying a stock means taking ownership of the business, with all the rights and responsibilities that implies? Apple needs a wake-up call before the damage is done.

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Berkshire Hathaway, Walt Disney, and Microsoft are Motley Fool Inside Value picks. Apple, Berkshire, and Disney are Motley Fool Stock Advisor recommendations. The Fool has written calls (bull call spread) on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Apple, Berkshire, IBM, and Microsoft. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Anders Bylund holds no position in any of the companies discussed here. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


Read/Post Comments (17) | Recommend This Article (23)

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 November 20, 2010, at 5:20 PM, demodave wrote:

    Surely, Apple doesn't care a lick about me, an individual investor. I agree. Apple only cares about my money. And to that end, they go through Machiavellian efforts to make products that trick me into buying themselves. I am a mindless sheep. I have wasted thousands ofmdollars buying Apple products.

    On the other hand, my holdings in AAPL are worth far more than the hardware I have purchased. No, wait, *that's* howmthey tricked me into buying their stuff. Yeah, yeah, they *bribed* me into it. :)

    The data and questions posited are no doubt interesting, but I definitely do not think Apple has "run its course". There *is* a lot of room for Apple to grow, and leadership has shown it is motivated to do so. You can argue that the iPad is just a big iPod all you want, but I think a claim of no originality is clearly uncalled for (but you already know I will).

    Two non-original, non-surprises that I expect to see are:

    1) "grand unification" of Mac OS and iOS

    2) greater business/enterprise uptake

    They may not be new, but I still think it will be exciting to watch them play out.

    All your financial gripes, though, I guess I really can't disagree with them. But I still think it's rational to Hold.

  • Report this Comment On November 20, 2010, at 6:26 PM, iamtellingu wrote:

    Thank God! I didn't listen to you last time! Otherwise, I would have been a loser like you! Should have brought ten thousand more shares when it dipped to $298 three days ago using the margin! Would have made another hundred grands in one day! Very bad. I guess I should just be content with the twenty hundred grands that I already have made so far.....

  • Report this Comment On November 20, 2010, at 6:28 PM, smatt989 wrote:

    hahaha another awful article about apple by someone who knows nothing about anything pertaining to the tech business. with your logic, microsoft would have been out of business 20 years ago because "customers would start to see that they're still basically buying the same old [Window's software] with new bells and whistles and wrapped in a prettier case." somehow, in a particularly stunning display if incoherence, you actually site microsoft as an example of what apple will become as a BAD thing, as if microsoft isn't one of the most successful firms in the world running on one of the highest profit margins in the industry. your second to last paragraph is particularly insightful, when you point out that the company (for some reason due to its soaring stock price) has misaligned incentives. this is such a misguided attempt to understand incentives its hilarious. FINANCIAL industries have misaligned incentives because the individual can profit even if the company in the long run fails. however, in the electronics retail industry, there are no "deals" or "mergers" that any individual can profit on. profits come from sales which come from good products and good marketing which improves stock prices. the incentives of apple, even without owning much of its own stock (which is a gross understatement by the way considering it owns billions of dollars of its own stock), are directly in line with its share holders. the company wants to make good products with high profit margins because that increases company profits. this increases company worth. that increases stock prices. stop writing articles. thanks.

  • Report this Comment On November 20, 2010, at 6:36 PM, marv08 wrote:

    Gosh. How many more times will you write that same old story? YTD Apple stock is up in the area of 43%, and most estimates project at least 20% more for 2011. Who treats shareholders better?

    They introduced the iPhone in 2007, the iPad in 2010 - both products far exceeded the estimated performance, the iPhone actually became the most important slice of Apple's revenue in less than 4 years, and most analysts expected Apple to sell a max. of 1 million iPads in all of 2010; it is safe to say that the real figure will be north of 10 million. Google invests heavily in the Android platform - what did it buy them? Yeah, around 21% of the mobile ad market, Apple achieved the same 21% in less than 6 months with iAds in one single country alone... (and they paid far less for Quattro than what Google paid for AdMob): everything they do makes money and they spend their cash wisely. Since 2003 the safest way to lose money is to listen to naysayers like you. Apple is the only company right now that aims where the market is going, while all the others follow with poor copies and at least one to three years delay. Maybe you should worry about them, but this does not generate as many hits, I assume?!

    A tech company that pays dividends is either a carcass, or under strong regulatory scrutiny (making large scale M&A impossible), or both. Your assumption that Apple will not continue to release new products is based on exactly what? Projecting the own lack of imagination onto others is not analysis, it is tasseography at most.

  • Report this Comment On November 20, 2010, at 7:30 PM, platymapus wrote:

    I'm almost speechless. What a narrow minded, short-sighted and illogical article.

    If I follow your logic, the auto industry should be out of business by now, right?

    The Motley Fool is a waste of time. All they want is your money, what's that song, money for nothing...

  • Report this Comment On November 20, 2010, at 8:38 PM, ejf9 wrote:

    you are a pedantic moron. apple has a very distinct design aesthetic, sure, but its designs have not become homogenized. the ipod touch is meant to look like a mix between an ipod and an iphone, and it does.... cause that's what it is!?! as far as the ipad, it is also a touch device, so it's going to have a touch screen.... are you not aware of this? the back of the ipad looks more macish than iOSish....... considering their minimalist approach, apple does a fantastic job of distinguishing their products. i think most would agree. you probably thing all black people look the same. clearly you know something about finance but you obviously know little about the tech industry. having celebrated your 1 month anniversary with your first android phone does not qualify you as an expert. either bone up or bone off.

  • Report this Comment On November 20, 2010, at 9:52 PM, Henry3Dogg wrote:

    @Anders, are you an alias for Scott Moritz, or just his apprentice.

    Do you believe is shareholder choice?

    If so then please accept that the shareholders of Apple like it the way it is, or they would have gone.

    Personally I'm out if they start paying dividends.

    You don't disclose any holding so we should assume you have none.

    So why not go and stir trouble somewhere else?

  • Report this Comment On November 20, 2010, at 11:00 PM, beetlebug62 wrote:

    You wrote, "I'm far more skeptical. "

    Why?

    You wrote, "the product line is becoming more and more homogenized"

    Is this supposed to be bad? Just because you can't imagine a future, doesn't mean that it doesn't exist.

    You wrote "Apple reinvented itself with the first iPod, and everything since has been a refinement or variation of that idea".

    Actually, the iPhone was quite a departure from any prior iPod, as no previous iPod had a touch screen. They all had click wheels. Now, the product line are all variants of the original iPhone.

    You wrote, "actually it's milking a basic idea that's getting long in the tooth"

    Apple has been milking its original Mac for how many years? 26? I think the current iOS product cycle of a little over 3 years would still be considered nascent by 99% of the world.

    I'm amazed that you would even remind anyone that you wrote that Apple would be the Worst Stock to own in 2010. Either you are incredibly dumb, or arrogant or both?

    You said "there is very little separating Apple from a deep, dark chasm of commoditization in a vast and growing sea of competitors"

    And, yet, Apple has been successfully competing against commoditization for almost 30 years. Should I trust Apple's track record or your thin prognostication?

    And then the key to your nonsense, you wrote, "Sales of iPhones and their accessories in the quarter that ended in September were 185% above the year-ago period according to GAAP sales, though up only 7% in units"

    What you didn't know is that Apple shipped 7% more units, but SOLD 41% more units. The crux of your argument was based upon a false premise.

    Why you would revisit your nonsense is stupefying.

    You wrote, "I mean, it's seen as innovation that Apple might be thinking about selling iPhones in Verizon (NYSE: VZ) stores next year. It doesn't take much, does it?"

    That's utter strawman nonsense. Noone, other than you, has floated the notion that selling thru Verizon is considered "innovation". Is this all you've got? Weak strawman arguments dissing Apple's innovation?

    You wrote, "This is why I'm not willing to risk my hard-earned dollars on buying Apple stock."

    How "hard" did you work to earn those dollars? By the quality of your analysis, I'd argue it wasn't very "hard".

    Now, back to the point, yes, as a shareholder, I'd like Apple to buyback shares. And, yes, I'd like Apple to distribute fewer shares as stock-based compensation. Simple. That's all you need to write about. And yet, you muddy this simple point by gussying it up with a load of tripe. You turn people off with your petty insults, to the detriment of your argument. That's not very Foolish.

  • Report this Comment On November 21, 2010, at 12:27 AM, mtghack wrote:

    Wow I'm impressed by all the AAPL sheeple. All bull comments and no bear. Adding it to my short watchlist.

  • Report this Comment On November 21, 2010, at 10:52 AM, timothyatwater wrote:

    indeed a foolish article. Just bought an ipod nano with touch screen and love it. I also bought the tracking pad and love it some more. Stock price speaks for itself; no debt does too. All that cash can make a shareholder feel secure. Steve is a GENIUS; no doubt. If you dont use apple products you dont know what you are missing and when you do you will love it. There is no better. HP and Dell computers are toast down the road unless they wise up.

  • Report this Comment On November 21, 2010, at 5:38 PM, PeyDaFool wrote:

    On August 28th, 2009, Anders wrote an article entitled, "How Cheap is Apple, Really?" in which he stated: "Apple is also considerably more expensive than most of these high-tech peers... Apple comes out looking fairly valued at best, and a bargain only if you put it next to Google...In fact, if you're looking for an affordable gadget designer, Garmin might be your best bet."

    Since August 28th, 2009...

    Apple is up 81%

    Google is up 19%

    Garmin is down 3%

    The S&P is down 9%

    In conclusion: AAPL is beating GOOG by 79%, GRMN by 84% and SPY by 90% since August 28th, 2009.

    Anders, would you care to comment on this? Specifically, why should we listen to your advice about moving forward when you have historically be wrong on the subject?

  • Report this Comment On November 21, 2010, at 5:44 PM, PeyDaFool wrote:

    Not to mention I missed Ander's other little gem in his article from August 2009: "If I owned any Apple stock, I'd sell today and lock in some profits -- because these prices can't last."

    http://www.fool.com/investing/general/2009/08/28/how-cheap-i...

    Just to remind you, again, AAPL is up 81% while the S&P is down 9%. Now that's what I call foolish with a lower case "f."

  • Report this Comment On November 21, 2010, at 6:56 PM, ConstableOdo wrote:

    I guess there are analysts that are always hoping that Apple will just collapse suddenly because it's done well in the last few years. Apple continues to open up retail stores. Apple has been selling products very well through I think what was considered a recession. Why don't these analysts go after Amazon which fundamentally appears even weaker than Apple even though it's been rewarding shareholders almost as well as Apple over the past year? Analysts think that consumers will just stop buying Apple products even though consumers are actually sort of trapped into the iOS ecosystem and would take some ugly losses by jumping to another brand. So far, Apple iOS devices are in very high demand. If the product quality is maintained why can't it stay that way for a couple of years.

    Apple iOS products are now even getting into the enterprise and that is rather unusual since it hasn't happened for so many years. It appears that the iPad is doing an end run around netbooks and that's even cutting into Windows OEM licenses. Why isn't it possible that Steve may actually buy a very key acquisition? Just because it hasn't happened before, it doesn't mean it can't happen. He said it could and there's no proof that he's lying. Every year there are analysts that say Apple will soon fail but yet it gets stronger quarter by quarter. Nothing in life is guaranteed forever, but it certainly could go on for a few more years. If Apple products become a well-known brand throughout the globe, why couldn't Apple maintain growth for at least a few more years. If a key acquisition is made it could maybe boost Apple's value by another 50%.

    I'm only saying it's hard to predict the future. I just feel that Apple seems to have things under control right now and they're not getting sloppy. They update their OS software often, they've been lowering prices to some degree and they treat their customers very well, so why the constant pessimism about Apple when analysts can easily come down on companies that are really screwing up their products and customers. Many influential people are buying Apple products and that is very important if these customers are CEOs and higher up executives. They're in the best position to exert their authority on their companies to use Apple products if they're inclined to do so.

  • Report this Comment On November 22, 2010, at 7:03 AM, TMFZahrim wrote:

    @ConstableOdo, all these wonderful things are possible, of course. But just because everything *could* go Apple's way over the next couple of years doesn't mean that smooth sailing is guaranteed. And it's still a one-and-a-half trick pony, possibly converting to a single trick if Mac OS X gets replaced by some version of iOS (as some pundits have suggested). It's a nice trick for now, but I still maintain that Apple hasn't been truly inventive for years, just very good at design and engineering. And mass psychology.

    Anders

  • Report this Comment On November 22, 2010, at 2:37 PM, TeddyKlugs wrote:

    Anders, pretty thin defense there considering all the issues your readers presented to you... No one said that "smooth sailing" is guaranteed. Apple will never fold iOS into Mac OS despite what silly pundits might suggest. If Apple hasn't been inventive in years, then why is nearly every tech gadget maker copying what they make?! The iPhone was a revolutionary device. The iPad likewise redefined a whole computer category very successfully. Name one company that YOU WOULD call inventive, um, please...

    TK

  • Report this Comment On November 22, 2010, at 3:35 PM, zunguri wrote:

    OK, so I'm an AAPL investor. I see the stock at historic highs. I see Apple sitting on a war chest that is hard to justify (the sitting, that is.) Should they pay a huge dividend perhaps? Maybe, but that sets future expectations and Apple is always known to under-promise and over-deliver. Stock buyback? At historic high prices? No, that's just moronic. You buy back when your stock price is weak Instead, I'd rather see them go out and acquire technology and businesses that will sustain future growth.

    Of course if the argument is that Apple should be sharing its success with me, the investor, I have to wonder, isn't that what they've already done by selling me shares that have gone up >500% since I bought them? I can cash in at any time by selling mine.

  • Report this Comment On November 27, 2010, at 11:53 PM, llavera wrote:

    First, I would like to explain I read the articles for learning about stocks. I only have money invested in mutual funds.. trying to educate myself.

    So for give the ignorance here. About four months ago I read that Netflex, Apple, Verison and the companies that make parts for the phones that will be coming out at the first of next year at verison were good companis to invest in.

    In this newsletter I have read that Apple, and Netflex may be looking at trouble in the future. So I started thinking...(LOL) if the talk is positve about these companies and then a few months later the word is to start having doubts in them in such a little time frame.

    What does this mean to me? Again, I will say I'm learning.

    1. Talk about how good the companies are and it's a good time to buy stocks, and people buy. So stocks increase. Right?

    2. Talk has it now that companies see trouble in the future. So we need to consider selling these stocks, the ones I just bought (not really). So now stock prices are down.

    3. It seems to me that people subscribe and read the news-letter for good solid advice, and you could have an influence on ones decisions on what to buy and when to sell.

    4. I ask who does this benifit??? Good research should show future trouble, and not be adviced.

    5. Should I sell my stock about two weeks after you talk a company up and more people are buying.

    6. Should I buy when a company is in trouble and prices are low?

    For the most part your articles are confusing.

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