On Second Thought, Apple -- We Don't Need a Dividend

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There have been a lot of people calling for Apple (Nasdaq: AAPL  ) to begin shelling out a dividend. I'm not one of them. The world's most valuable tech company has better things it can do with its money. However, now it seems as if taking a stick to the pinata of Apple's roughly $100 billion in cash and marketable securities isn't enough.

Bernstein Research analyst Toni Sacconaghi suggests that Apple should take out between $50 billion and $100 billion worth of debt to begin shelling out a meaty payout.

Just like that, the world's richest company would become its biggest borrower.


There's a method to Sacconaghi's madness -- and it is a madness. He sees that two-thirds of Apple's hoard is bolted down overseas, at least until the U.S. drums up a cost-effective carrot for major corporations to repatriate their profits without getting walloped by taxes. Apple's a globetrotter, and that now means that less than a third of its current profits are stemming from stateside operations that can be played without triggering repatriation hits.

Fair enough. We know that Apple's greenery is overstated on its balance sheet because of our country's out-of-whack repatriation policy relative to the rest of the world. Why should this make Apple a panhandler just so it could crank out a 2.5% yield?

It doesn't make sense.

You know who has a 2.5% yield? Microsoft (Nasdaq: MSFT  ) . Just a few years ago, the global software leader was more valuable than Apple. Are you telling me that investors would prefer to have invested in Mr. Softy over the past five years -- collecting a growing dividend along the way on top of a roughly 25% pop in capital appreciation -- than see an Apple investment catapult sixfold?

Cisco (Nasdaq: CSCO  ) is another company that was worth more than Apple a few years ago. The networking behemoth was even the country's most valuable company at one point just before the dot-com bubble burst. It recently initiated a distribution policy. Is Cisco's 1.6% yield really a consolation prize given the underlying stock's underperformance?

If Apple believes it needs to begin offering up a modest dividend to give its shareholders some App Store pocket change, fine. I don't agree with it. Let Apple deploy its cash in the form of acquisitions -- here and abroad -- that will deliver incremental growth, or turn to stock buybacks that will improve profitability on a per-share basis. Why dabble in taxable dividend events over the moves that are tied closer to capital appreciation?

However, if a payout is in Apple's future -- even if for Cisco and Microsoft it's really been a "jump the shark" moment -- please don't ask the class act of Cupertino to borrow money to do it. I don't care about how low its financing rate would be or how happy it would make investment bankers.

Apple isn't broken. Stop trying to fix it.

Apple jacks
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The Motley Fool owns shares of Apple and Cisco Systems. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (8) | Recommend This Article (5)

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  • Report this Comment On March 14, 2012, at 10:15 AM, toneill69 wrote:

    yes to debt reduction to zero but i thought it was free of debt already.

    As a matter of principal there should be a dividend,

    but i do agree that debt should be eliminated

  • Report this Comment On March 14, 2012, at 10:19 AM, nuijel wrote:

    So basically your point is: Apple is a great business, so whatever they do is necessary right...

    Unless you can explain to me why hoarding $100B is a cause of the success of the iPad, I am not convinced.

    Acquisitions? Unless Apple is planning to buy Google or Microsoft, I don't see why it needs that much money.

  • Report this Comment On March 14, 2012, at 10:19 AM, gslusher wrote:

    "turn to stock buybacks that will improve profitability on a per-share basis."

    Ah, No. When the stock is soaring at record highs is NOT the time to do a buyback. The price of AAPL doesn't need to be "juiced."

    It would also have almost no effect on the price in the long run. For years, Apple's stock price has NOT been correlated with its earnings. In fact, as Horace Dediu of Asymco has shown, the only real correlation has been with Apple's cash, at least until now. Whenever Apple's EPS went up, the PE went down almost enough to compensate.

    Most important, how would a buyback help Apple? The company would have less money to work with and nothing, at all, to show for the money they'd spent. Apple gets NOTHING from an increase in stock price.

    Stock buybacks have no better record than dividends. Microsoft and Cisco both did large stock buybacks, as well as paying dividends.

    There's way too much paying attention to the expectations "market" instead of the real market. As Roger Martin shows in "Fixing the Game," if the NFL was run that way, the coaches would be looking to beat the spread, rather than win. It would make football boring. Instead, the NFL knows why they're in business: to provide entertainment for fans. Whatever speculators (bettors) make or don't make is irrelevant. Apple is one of the few major companies that IS run for the customer. As Peter Drucker said, the ONLY mission for a business is to create a customer, someone who will buy and then come back and buy again. Does that sound like any company you know?

  • Report this Comment On March 14, 2012, at 10:22 AM, gslusher wrote:


    Apple has no debt. Tony (whose record at predicting Apple's performance is dismal, to be generous) is suggesting that, like Microsoft, Apple should borrow money to pay a dividend.

    "As a matter of principle there should be a dividend."

    What "principle"? I've made an annual return of over 66% on AAPL stock. How would a 2-3% dividend help, especially if I have to pay taxes on it?

  • Report this Comment On March 14, 2012, at 11:10 AM, lojikfool wrote:

    A dividend would be foolish indeed, share buy backs would be the most Foolish course of action.

    The only benefit from a dividend would be opening up the stock to funds and private investors who only invest in dividend paying stocks, which will far outweigh those who currently hold Apple who would divest once a dividend was paid if they somehow incorrectly saw that as a watershed moment between growth and value.

    With so many funds and individuals maxed out on their Apple weight in their portfolios it's hard to think of other catalyst to push the stock to fair value. Doe's anyone have a handle on what proportion of the investing market cannot or will not buy Apple until they issue a dividend, that's the real question...

  • Report this Comment On March 14, 2012, at 11:38 AM, iphonerulez wrote:

    You'd be surprised at how many comments I've read saying that investors would rather have Microsoft's dividend over owning Apple stock. To some investors, dividends are everything. They don't care if their stock stays stagnant for years as long as they get a dividend check every quarter. There must be a feeling of safety in a dividend like sticking money into a piggy bank.

    At least it's not gambling because it's a sure thing. If an investor already has lots of money invested, then I'd say a healthy dividend is a great thing to have. You just won't get rich from holding on to a stagnant stock. I'm just glad I chose to buy Apple in 2004 instead of Microsoft. No dividend but the stock growth has been nothing short of fantastic. I got lucky.

  • Report this Comment On March 14, 2012, at 2:57 PM, ClimbinFool wrote:

    I don't quite follow the logic behind the MSFT and CSCO comparisons. Are you saying that because they declared dividends they underperformed compared to AAPL? Are you saying that if AAPL had declared dividends around the same time as MSFT and CSCO that the stock wouldn't have performed as well?

  • Report this Comment On March 15, 2012, at 12:28 AM, jdwelch62 wrote:

    @iphonerulez: you said it yourself, you got lucky. For every astronomical Apple there are scores if not hundreds of stocks that are duds & leave their shareholders with little or nothing. Dividend investing is a "safer" play than purely growth investing because it has been shown over & over that, over time, dividend yielding stocks outperform stocks that don't pay a dividend. AAPL makes up about 8% of my portfolio, which is plenty; almost all of the rest of my positions yield dividends, at an average of 5.5%+. That's a hedge against a bear market, while in a bull market I can expect to see good, but probably not astronomical, returns on my equities' value. Then I reinvest the divvys & perpetuate the cycle. I've only got ~17 years left before I'll have to retire, if that, so my risk tolerance is about midpoint, which is probably a bit aggressive for someone my age, but I've got some catching up to do. Stocks like MSFT & INTC were stagnant for about a decade, but that was an anomaly, as I think AAPL's recent meteoric rise has been. Two trite euphemisms for you:

    - "The higher they climb, the harder they fall."


    - "Pigs get fed, hogs get slaughtered."

    AAPL might make it up to $730+, but then again, it might not. If you've been sitting on AAPL shares for a while & have enjoyed the wild ride up, you need to figure out when to be a pig so you don't end up a hog...

    Fool on!... :-)

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