A week ago, I chastised three companies for not paying dividends. Though Google
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
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
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
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.
