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Why Apple Won't Pay a Dividend

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When Bill Gates started Microsoft (Nasdaq: MSFT  ) , he knew he needed two things in spades: smart people, and cash. Too many companies forgot about the latter. The technology world transformed so quickly that not having enough cash to change course ruined many.

"I soon came up with this incredibly conservative approach that I wanted to have enough money in the bank to pay a year's worth of payroll even if we didn't get any payments coming in," Gates once said while CEO. "I've been almost true to that the whole time."

Microsoft has been berated for its cash hoarding. But Apple (Nasdaq: AAPL  ) has taken things to a whole new level. With $76 billion in the bank, Apple has enough cash to pay its overhead expenses for 14 years without a dime of revenue. Steve Jobs makes Bill Gates look like a gambling man.

There aren't enough superlatives to describe Apple's cash hoard. If Apple's bank account were a country, it would be 64th largest in the world, ahead of the annual output of Ecuador, Croatia, and Luxembourg. If its bank account were a standalone company, it would be the 34th largest among the S&P 500. If interest rates rise to pre-crisis levels and Apple can earn 5% on its cash, the interest income alone would generate more profit than all but 45 American companies.

These numbers are unequivocally absurd. Apple has to do something big with its cash. So far, management has hinted at acquisitions. "We strongly believe that one or more very strategic opportunities may come along that we can take that we're in a unique position to take advantage of because of our strong cash position," Jobs said last year. But cash levels are so high that acquisitions might not make more than a dent. There are fewer than 100 companies with market caps over $50 billion, and of those, very, very few are in the media or technology space. Further, some $8 billion to $10 billion is being added to Apple's hoard every 90 days. It's doubtful the company will be able to dispense with its cash on acquisitions alone.

That raises the question: Will Apple pay a dividend?

From an investor standpoint, it should. One of the fastest-growing large-cap companies in the world, Apple trades at a decidedly dismal multiple of 13 times forward earnings. That's barely on par with the market average, and it's lower than many companies whose prospects don't come close to Apple's. The likely reason: no dividend. Last year, value investor Bill Miller noted that the telecom industry grows at one of the slowest rates but trades at the highest valuation. Why? Because it focuses on dividends. The technology sector is one of the few bright spots in the economy but trades at one of the lowest valuations. Investors pay up for growth, but they go nuts for big dividends.

How big could Apple's dividend be? Paying out half of its free cash flow could support a dividend yielding more than 4% at current share prices. This wouldn't even touch its $76 billion hoard -- the 4% dividend could be paid out of earnings even while adding billions to its war chest.

Odds are the market wouldn't let that yield stay at a lofty 4%. Not for a company that grows like Apple. A more reasonable 2% dividend yield would require bidding shares up to double their current levels. At that point, Apple would become the most valuable company in the world by far. As it should be. Have you been to an Apple store on a Saturday morning?

So why doesn't Apple dive into dividends?  

Two big reasons.

First is repatriation taxes. More than 60% of Apple's cash was held overseas at the end of last year. To use this money for dividends or buybacks (or even domestic acquisitions), it would owe repatriation taxes to the IRS. That could cost billions. Apple is among other international giants such as Oracle (Nasdaq: ORCL  ) , Cisco (NYSE: CSCO  ) , and Pfizer (NYSE: PFE  ) lobbying hard for a repatriation holiday, which would let companies bring foreign cash home virtually unscathed. These holidays have been granted in the past, most recently in 2004. Others are pushing to get rid of repatriation taxes altogether, as Canada, Japan, Germany, and France already have. It wouldn't be wise for Apple to do anything big with its cash until there's more clarity on this issue. So it waits.

More controversially, investors should look at Apple as the antithesis of General Motors (NYSE: GM  ) . GM lost its way when engineers and design techs were pushed aside by MBAs and bean-counters. Apple found its success focusing obsessively on creating the best products in the world, end of story. The company is run by design geniuses. And geniuses they are; they've created one of the greatest brands in the history of business. But because their focus is so product-driven, I get the feeling management isn't losing much sleep over maximizing shareholder value. My colleague Rich Greifner was more blunt: Steve Jobs couldn't care less about you.

That attitude explains why Apple is so successful, but it also might explain why it doesn't pay a dividend.

Fool contributor Morgan Housel owns shares of Microsoft. Follow him on Twitter at @TMFHousel. The Motley Fool owns shares of Oracle, Cicso, Microsoft, and Apple and has created a bull call spread position on Cisco. Motley Fool newsletter services have recommended buying shares of Apple, Microsoft, Cisco, General Motors, and Pfizer and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (15) | 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 July 23, 2011, at 1:03 PM, prginww wrote:

    Seriously--is there any down side to investing in Apple? Would'nt the world literally have to blow up before that would happen? I think Apple may take over the world eventually -- only a slight shift in plot to "The President's Analyst"!

    But don't forget I'm known for being foolish:)

  • Report this Comment On July 23, 2011, at 1:04 PM, prginww wrote:

    Yahoo reports $28.4B in cash. Where does the $76B come from?

  • Report this Comment On July 23, 2011, at 1:26 PM, prginww wrote:

    ^ Part of its cash is in short-term debt securities and considered "cash equivalent" but doesn't show up on some cash calculations.

  • Report this Comment On July 23, 2011, at 2:02 PM, prginww wrote:

    "But because their focus is so product-driven, I get the feeling management isn't losing much sleep over maximizing shareholder value."

    It occurs to me that while you make this sound like a bad thing, it is precisely what makes AAPL an attractive investment.

  • Report this Comment On July 23, 2011, at 2:15 PM, prginww wrote:

    ^ From the article:

    "That attitude explains why Apple is so successful, but it also might explain why it doesn't pay a dividend."

    I absolutely agree that it is what makes apple successful. Ditto for Facebook.

  • Report this Comment On July 23, 2011, at 3:08 PM, prginww wrote:

    Would they consider a stock split? If not, why not?

  • Report this Comment On July 23, 2011, at 3:15 PM, prginww wrote:

    I believe apple to be a part scam why do they keep printing shares and diluting the outstanding shares of the company? Every quarter they print another five million or so shares?? It's not like they need to raise capital so what gives?? Also it's hard to believe there selling this amount of goods like they are in this economy especially considering how expensive they are...something dosent add up with this company not to mention everyones favorite CEO Steve jobs was originally fired from apple and was down and out pretty much, so who's to say there not cooking the books and exgratting on there sales. And to keep it up they keep printing shares I'm sending in information to the sec because something does not add up with apple.

  • Report this Comment On July 23, 2011, at 3:27 PM, prginww wrote:

    Dan the man... that was truly one of the most conspiratorial posts ever. And to be clear... I think you are dead wrong on all counts. Time will bear this out.

  • Report this Comment On July 23, 2011, at 4:29 PM, prginww wrote:

    Apple done great since Steve Jobs came back from his exil ... smarter, wiser and more focused. The odd thing is much appears to be lost of management and Jobs. I doubt it will affect the bottom line - and if it did, it may not affect the bottom line more than a few fractions of a percent (0.0001%?), but Apple does have areas where they can put some of their vast hordes of cash.

    1) XServe hardware - they killed this with little notice and there was no effective replacment for this hardware. This is horrible for several reasons

    a) Enterprise requires at least 18 to 24 months notice for products (upgrades, downgrades and otherwise). Apple hates doing this, so they just pull the run from under various IT shops that depended or relied on Apple's XServe hardware.

    b) Even if Apple eventually comes up with a replacement - it may be too little too late. Thousands of customers are already bitter ... maybe 50% come back, but the whole (apparent) reason that XServe's were cut was because of 'lack of sales' though I doubt they actually calculated the real total in sales (since XServer's also go with XSANs, XRAIDS, high end software - FCPro Studio, etc...).

    2) Final Cut Pro was destroyed by Apple... sure Final Cut Pro X (iMove Pro X?) has its merits, but Apple completely bungled this - as with the XServe hardware. Final Cut Pro X is not a replacement for Final Cut Pro 7 (or Studio) - not by a long shot and to top it off, you could not even order the old product from Apple (or its distributors) for twice the price ($2,000 + ) if you wanted to (kinda like the XServe's). Again, here's a fairly pricey product that they may not sell a ton of, but it also encourages sales of other products - maybe even non related products.

    Other areas of the Mac OS (OS X, not iOS) have also floundered - and Apple is (presumably) stepping up its game with improvements it its OpenGL software (improvements even Linux and Windows has had for some time) and Apple has Thunderbolt interconnects which are great for the true pro users (so why did they do this and kill/piss on 75% of the pro users out there?).

    Finally (probably the smallest issue overall, but biggest for me personally) is the screens that come with Apple devices are way to reflective (shiny)... so much so that my 5+ year old Apple 20" is about 5x better than the newest iMac screens Apple is releasing. There is no option (AFAIK) to go to a matt screen on an iMac .. I think the MacBooks may drop the option to go to matt display... so that means I have to get a Mac Mini (not bad for the performance/price) or a Pro Tower (damn expensive and generally overkill for what I do) ... or maybe I just go with a generic PC and try to get some random Linux distro to work almost as good as my Mac, but it has a much better (and probably cheaper) display.

    ... this may not add up to a hill of beans, but if there were real engineers still at Apple (and not fixated on iOS), these would not be issues and would not impact Apple in a negative way.

    I'm sure Apple will make a killing with iOS and I'm sure Final Cut Pro X will sell and make more money for Apple, but they dont have to be dicks about killing 'old' or 'not hot selling' products just because they take a few engineers to maintain.

    In short - Apple can have it all... the real tech they were founded on (OS X, NeXT, BSD, Xerox Parc, postscript, etc...) but also make a killing on selling billions of iPads, iPhones and iTVs and whatever else they dream up.

    It is sad when a company so brilliant drops the ball on things they - one would think - would be "easy" for them to develop:

    - enterprise grate rack mountable hardware: XServe, XSAN, XRAID (and XRAID's replacement)

    - industry standard, enterprise level video editing systems

    - Blue ray (run it through a virtual machine ... maybe its 'crappy, but it works'?) ... and say why they have to make it crappy

    - reflective displays - this just means you have to make the monitor that much brighter to compensate .. .but it wont compensate when the video is dark/black and/or the lighting is not perfect (and most places are not close to perfect) ... Apple is losing sight - maybe it is the bean counters. Maybe in 50 years they will be worse that General Motors is now?

    /end of long rant

  • Report this Comment On July 23, 2011, at 7:18 PM, prginww wrote:

    I'd have to agree that Steve Jobs doesn't care about shareholders as far as monetary gains are concerned. He's building his company to his standards and he isn't a bean counter. However, as long as he focuses on selling quality products to consumers and businesses, then indirectly shareholders do benefit. It isn't as though shareholders haven't been getting any returns because I know my Apple holdings have been my best investment ever. I just believe that Steve is too busy fulfilling his own dream to concern himself overly with shareholders.

    The company is more than thriving and that's certainly important to shareholders. We may not be getting all the perks of some shareholders of lesser companies, but that's just the way it is and I'm not dumping my Apple shares to buy some stock with a dividend. Since I believe that Apple as a company knows what its long-term goals are, I'll just try to be patient and hope for the best. I especially hope nothing terrible happens to Steve Jobs because the hedge funds will try to wreck the company by dumping all their shares.

  • Report this Comment On July 23, 2011, at 7:48 PM, prginww wrote:

    I've sold my Apple share to take advantage of the gains.

    Then when the US defaults on it's debt, the market will crash. Then I can pick up more Apple stock.

    Apple has been my best investment ever. Buy low, sell high!

  • Report this Comment On July 23, 2011, at 9:24 PM, prginww wrote:

    Horace Dediu,, has some fundamental concerns on whether stockholder value is enhanced by dividends and stock buy backs or even big acquisitions, e.g., Hulu rumors. Looking at the record of other companies, MS and INTEL, the evidence is pretty clear there is little added stock value from these knee jerk reactions to Apple's cash. Horace does have some interesting ideas, but whether they are right is not the issue. The standard approach simply does not work and I believe the Apple board realizes this. Keep in mind this mantra has been running for years by people with little imagination and as far as I can see the Stockholders are doing just fine with huge growth opportunities based on very very conservative income projections.

  • Report this Comment On July 24, 2011, at 8:01 PM, prginww wrote:

    all said.... dec. 31.....450 a share....

  • Report this Comment On July 24, 2011, at 8:04 PM, prginww wrote:

    if not more...

  • Report this Comment On August 10, 2011, at 3:04 PM, prginww wrote:

    You wrote,"Apple is among other international giants such as Oracle (Nasdaq: ORCL ) , Cisco (NYSE: CSCO ) , and Pfizer (NYSE: PFE ) lobbying hard for a repatriation holiday"

    Uhm, do we know Apple is "lobbying hard for a repatriation holiday"? I mean, Apple's lobbying totals are tiny relative to other large companies. They seem to hardly lobby at all based upon the funds spent, so I wonder if they've been confirmed as lobbying for a tax holiday.

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