Analyst: Paying a Dividend Makes Sense for Apple

| Apple Stock Watch

Apple's Money BagPaying a dividend makes sense for Apple, according to Sterne Agee analyst Shaw Wu. In a research note to clients obtained by The Mac Observer, Mr. Wu argued that a yield between two percent and three percent would be attractive to investors and not threaten Apple’s still growing cash hoard that was worth US$97.6 billion at the of the last quarter.

Mr. Wu believes that Apple will generate another $75-$80 billion in cash during calendar 2012, almost twice what the company generated in 2011.

The analyst said that with Apple’s annual shareholder meeting taking place on February 23rd, there is likely to be renewed pressure from shareholders on the company to begin some sort of dividend program. Investors, analysts, and hedge fund managers alike have been calling on Apple to pay a dividend since the company’s cash hoard first hit the $30 billion mark more than two years ago.

Starting in December, however, predictions of a “significant” Apple dividend began coming from several quarters, including Howard Ward, a money manager from Gamco.

One of the arguments made by Sterne Agee’s Shaw Wu on Friday is that if Apple pays a dividend, it will open up the stock to a new class of investors. More specifically, there are many funds both large and small that only invest in stocks that pay a dividend, and Mr. Wu said, “We believe this should help further stabilize its shareholder base.”

This is actually an important issue. Apple’s stock has become so valuable and grown so fast that some funds with large holdings in the company can’t invest any more money in the company according to their own rules. Some have argued that this has kept an artificial lid on the stock’s value, though that hasn’t stopped AAPL from growing more than 20% since the beginning of 2012.

Whatever the case, Mr. Wu is undoubtedly correct that shareholder pressure on the company to pay some of its vast cash holdings back to investors is going to be intense this year. Apple simply has more money than it could reasonably spend given the company’s track record of small acquisitions and that cash hoard is still growing.

It has reached a point where Apple can pay a dividend and still keep more money than dozens of countries produce in annual GDP. That’s money the company can continue to use to manage its supply chain, build new stores, construct destination company headquarters, and occasionally buy companies worth a few hundred million dollars, all several times over and then again.

Mr. Wu Maintained his “Buy” rating on AAPL, as well as his $550 price target on the stock. The stock traded higher throughout most of Friday, but gave back those gains as the afternoon session wound down to $493.14, down $0.030 (-0.01%), on heavy volume.

*In the interest of full disclosure, the author holds a tiny, almost insignificant share in AAPL stock that was not an influence in the creation of this article.

Comments

Garion

Whether it makes sense to an analyst or not, they ain’t gonna do it.

Lee Dronick

Whether it makes sense to an analyst or not, they ain?t gonna do it.

You are probably correct about that. A split perhaps?

Dave Hamilton

@Garion—I agree with you 100%.

Mr. Wu is right that Apple has plenty of cash and could easily afford to pay a dividend. But… should they? No one *bought* Apple with the expectation of a dividend. Why the pressure now, especially when anyone who bought, well… EVER… has already increased their potential value (I say potential for the obvious reason that unless one sells right now, there’s no guarantee of you making money). There’s no history of this, I don’t see Apple caving to this. In fact, if I were Apple, I’d suggest to the shareholders to sell if they don’t like the way the company is being managed. Apple’s had great success NOT listening to its shareholders *or* its customers (in many ways). Why start now?

Bryan Chaffin

I believe it will. This year, at that.

Bryan Chaffin

And this is why: As Apple’s cash hoard grows, the propensity of its shareholders to give management free reign over that cash is shifting and will continue to shift.

While some argued for a dividend more than $70 billion ago, the majority of shareholders were quite content to let the company keep doing its thing. I was certainly among them. Apple was clearly showing us that it knew what it was doing, and I was quite content for it to continue to do so.

As the hoard continued to grow, however, the argument that the company needs all of that money to keep doing its thing became weaker. from my perspective, at $60 billion, there is simply no way for Apple to spend even half of that sum in any reasonable way. It needs a small fraction for securing its supply chain, building new stores, and making the small acquisitions that actually work for the company.

Now we’re at A$100 billion, and it will likely hit the $110 billion mark this quarter.

That’s a lot of money, enough to pull more shareholders towards the camp of voting for a dividend. The more cash at stake, the more votes for a dividend.

And that’s not even taking into account the great argument Mr. Wu made about opening up the stock to a new class of investors, which is a VERY important issue.

There’s another thing, too. We have a new person at the helm. Steve Jobs has passed away and Tim Cook is in charge. He already told us he has no religion on the issue, a significant departure from Steve Jobs, who did. To me, that was the obvious signal that a dividend was coming.

It will happen this year. It makes sense for Apple to do so, whereas before it didn’t. End of story.

I am open to a wager on this.

Bryan Chaffin

Lee, a split won’t do anything to address its cash hoard. It’s something the company could do, of course, but it won’t have any effect on its cash or reduce pressure from shareholders to pay a dividend.

Lee Dronick

Lee, a split won?t do anything to address its cash hoard. It?s something the company could do, of course, but it won?t have any effect on its cash or reduce pressure from shareholders to pay a dividend.

This is actually an important issue. Apple?s stock has become so valuable and grown so fast that some funds with large holdings in the company can?t invest any more money in the company according to their own rules.

Wouldn’t a split bring the price of a share down to about $250?

Bryan Chaffin

If a fund already has, say, 10% of its money (a figure I am pulling out of thin air), doubling the number of shares outstanding to halve the price won’t change anything. They’ll have twice the shares at half the price and it will still be 10% of their total assets, the theoretical limit of how much of their fund can be in one basked at our fictitious fund.

The price per share might affect the way small retail investors (i.e. ordinary people) buy a stock. For instance, someone with $2,000 to invest might not want to spend all of it to buy four shares of AAPL for various psychological reasons, but that’s not the way funds and institutional investors think.

And small retail investors represent a very small slice of the Wall Street pie.

webjprgm

I still don’t see the benefit to Apple to pay a dividend.  Shareholders might want it, and they might try to force it by voting on a measure at an annual shareholder meeting, but why would Apple want it?  Except maybe if high-level executives control large amounts of shares and could thereby get lots of cash.  Otherwise, what does Apple care about what class of investors are buying their stock?

Bryan Chaffin

Apple’s board of directors and offers have various fiduciary responsibilities to the company’s shareholders. Remember that the shareholders own the company.

Additionally, the board and all of Apple’s current officers do own what I consider to be large quantities of Apple’s stock, so they could benefit from a dividend, but benefitting themselves is actually not a reason for Apple to pay a dividend. It’s their duty to the shareholder that matters.

Dividends are paid to help boost or support a stock’s price. Apple doesn’t need the support at this time, but a dividend would likely increase the price of the stock. Boosting the value of the company is one of those fiduciary responsibilities I mentioned.

As for your question about class, you may be getting hung up on the wrong definition of class. In this case, think of it more as a “group of investors,” rather than a “class of investors.”

If Apple can broaden the pool of investors who can buy the stock, it would likely mean that the price of the stock would increase as more people would be competing to buy it.

For most companies that’s not really much of an issue, but Apple is worth more than every other company on the planet. That value is derived from the pool of investors buying the stock, but as noted above, there are some large investors who simply can’t buy any more Apple stock, which means they can not compete and push the price higher. For Apple, broadening the pool could mean a higher price.

Above and beyond the responsibilities to its shareholders I mentioned, Apple also has an interest in its stock going up in order to attract and keep top talent. Since a dividend could facilitate a price increase, a dividend could also help the company attract and keep said talent.

Garion

You are probably correct about that. A split perhaps?

Yes, I’d consider a stock split more likely than a dividend.

Paying out a dividend is a tool most companies use if they want to pump their stock value. Does Apple look like a company that needs to pump its stock value artificially at the moment? grin

Anyway, growing the entire stock value by 20% since New Year gives stockholders a LOT more value than any dividend!

skipaq

Having purchased a few hundred shares in Apple when the price was around $17 per share; I have seen the benefit of a stock split. But that benefit was the result of the share price climbing so that 3x shares at $500 per is a whole different world. No dividend could match that.

However, the current share price makes repeating this by splitting the stock unlikely to say the least. Would there be a run up if the stock went 2 or 3 for 1? From the viewpoint of the small investor a dividend becomes more and more interesting. A split will not reduce the pile of cash anyway. If there is no dividend that pile continues to grow and the pressure will increase for a dividend.

The dividend won’t add much cash value for a small investor. But it will increase the demand for shares in Apple; which can be a force to push the stock higher. This would also be a plus if there should be a split.

BurmaYank

One of the arguments… is that if Apple pays a dividend, it will open up the stock to a new class of investors. More specifically, there are many funds both large and small that only invest in stocks that pay a dividend, and ... this should help further stabilize its shareholder base.

[i”]I still don?t see the benefit to Apple to pay a dividend.? Shareholders might want it, and they might try to force it by voting on a measure at an annual shareholder meeting, but why would Apple want it?? Except maybe if high-level executives control large amounts of shares and could thereby get lots of cash.? Otherwise, what does Apple care about what class of investors are buying their stock?”

This is exactly what I was wondering, and so I very much appreciated Bryan’s edifying response:

“Apple?s board of directors and offers [sic] have various fiduciary responsibilities to the company?s shareholders. Remember that the shareholders own the company…
Dividends are paid to help boost or support a stock?s price. Apple doesn?t need the support at this time, but a dividend would likely increase the price of the stock. Boosting the value of the company is one of those fiduciary responsibilities I mentioned.”

But I still wonder if Apple?s management’s fiduciary responsibility to maximize the value of the shareholders’ stock holdings could not also be accomplished longer-term just as well by simply continuing its present policies that exclude/discourage the sort of investors who need their stock to pay a dividend.

Yes, I can see how “...Mr. Wu is undoubtedly correct that shareholder pressure on the company to pay some of its vast cash holdings back to investors is going to be intense this year. Apple simply has more money than it could reasonably spend..”, and that this might well become an overwhelming political problem for Apple should it continue to grow without distributing dividends.

But on the other hand,  I’m just as worried that thus opening up the stock to this new class of investors would undermine the current BOD’s ability to focus more upon the health of Apple’s operation than upon the value of the stock, and thus poison the Apple management’s successful culture with typical trashy WallStreet ideologies.

Apple is better off because ”...some funds with large holdings in the company can?t invest any more money in the company according to their own rules. Some have argued that this has kept an artificial lid on the stock?s value, though that hasn?t stopped AAPL from growing more than 20% since the beginning of 2012.”

And surely, Apple has no need whatsoever to ”...further stabilize its shareholder base.” No?

aardman

A lot of people don’t seem to understand the economics of a stock split.

Bryan Chaffin

I’m still willing to take a wager on this. smile

If you haven’t read our piece on Tim Cook’s comments about cash, do so. This is precisely the way he (and Steve Jobs) communicated to analysts that Apple would fight the netbook with what we now know of as the iPad.

A dividend is coming. It will come later this year?by the shareholder meeting of 2013 at the VERY latest.

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