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.
