Apple's (Nasdaq: AAPL) Monday announcement that it will pay a $2.65 quarterly dividend and buy back shares was a long time coming for investors. We've had a lot to say on this subject over the years as Apple stockpiled cash on its way to becoming the world's most valuable company. Steve Jobs, the late Apple co-founder, famously opposed dividends, at one point saying he preferred to hold on to the company's cash hoard for acquisitions and bold investments. With Tim Cook now at the helm, that policy has changed, leaving just two other megacap companies -- those worth more than $100 billion -- that don't pay dividends: Google (Nasdaq: GOOG) and Berkshire Hathaway (NYSE: BRK-A)(NYSE: BRK-B).
Those two are both flush with cash: Google holds $45 billion in cash equivalents, while Berkshire counts $37 billion in greenbacks its balance sheet. As a percentage of their market value, they're more cash-rich than Apple, though the two are subject to different circumstances.
Buffett's baby
Warren Buffett's operation functions largely as a holding company, and its cash tends to accumulate until he finds worthwhile buying opportunities. Berkshire hasn't paid a dividend in 47 years, and Buffett once said he will pay dividends when he believes he can't create a dollar of market value out of a dollar in retained earnings. Implicit in the decision to own Berkshire shares is the desire to have the greatest investor of our time allocating your money for you, and having Berkshire return money through dividends would defeat that purpose.
Buffett's recent investments in Bank of America and IBM, as well as his purchase of the Burlington North Santa Fe railroad, have garnered much attention. The billionaire investor also recently announced for the first time a share-buyback program that he'll implement when Berkshire stock drops to less than a 10% premium over book value. Vice Chairman Charlie Munger has also acknowledged that Berkshire will probably have to pay a dividend eventually, but the 87-year-old said he hopes he doesn't live to see that day.
Given Berkshire's business model and Buffett's investing acumen, it seems unlikely that the company will issue a dividend while Buffett still presides over it.
Big G
Google, on the other hand, is a much different animal. Founded in just 1998, the brainchild of Sergey Brin and Larry Page grew to a value of more than $200 billion in less than 10 years. Thanks to its dominance in online search, the company brings home piles of cash as it continues to grow at a brisk pace, with free cash flow of $11 billion last year and a profit margin of 25%. Berkshire, by comparison, has a profit margin of just 7%, and its net income declined from 2010 to 2011, though it takes in similar amounts of free cash flow because of its size.
Investors also see Google as a peer to Apple and therefore may be choosing between the two for their investments. Apple's dividend offer sweetens the deal for its shareholders and may put pressure on Google to keep up.
But like Berkshire, Google is also fond of acquisitions. The company recently committed $12.5 billion to acquiring Motorola Mobility, and the money has yet to come off its balance sheet. In its history, Google has acquired more than 100 other companies, including YouTube, DoubleClick, and Android. And much of Google's cash, like Apple's, is tied up overseas and would be subject to repatriation taxes if brought home. Taking away its foreign cash, the $12.5 billion for the Motorola deal, and its $4 billion in debt, Google has only about $3.5 billion in cash in the United States. Under those circumstances, a dividend anytime soon seems unlikely, but with a solid growth rate and free cash accumulations of more than $10 billion a year, it wouldn't be surprising to see a dividend in the next five years.
Two more to consider
Other large-cap companies that have the potential to become dividend-payers include Amazon.com and Dell.
Amazon, with its strong growth rate and sky-high P/E, still appears to be in its expansion phase for now. The online retailer has about $10 billion in cash equivalents, but it claimed just $2 billion in free cash flow last year. With expansion projects in digital media and its recent acquisition of Kiva Systems, Amazon seems to be a long way from returning cash to investors.
PC-maker Dell, on the other hand, is loaded with about $15 billion in cash and equivalents out of a market cap of just $30 billion. The company is facing a changing industry, though, as the rise of tablets threatens traditional computers. Dell barely grew in 2011, and analysts are predicting growth near only 1% for this year and next. The stock has taken a beating in the process, down by almost half from its pre-recession highs. Considering the changing industry landscape, Dell's cash may be better used in R&D initiatives than as shareholder dividends.
Past is prologue
Microsoft and Intel (Nasdaq: INTC) were both once tech darlings that grew into the megacap titans they are today, and the stock prices of each company have remained essentially flat since they began offering dividends nearly 10 years ago.
Perhaps, then, this is the key takeaway in the dividend debate: Dividends may be nice, but a multibagger is nicer. Companies such as Apple, Google, and Berkshire have soared to great heights without the help of dividends, and their shareholders didn't invest for the quarterly payments. After all, with just a 1.8% yield on offer from Apple, shareholders could do plenty better with a host of other companies. The challenge now is for Apple to maintain a continuing level of share-price growth, eluding the fate of Microsoft and Intel before it.
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