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Dividends are taxed like...dividends. Through 2012, qualified dividends are taxed at 0% or 15% depending on the recipient's income, same as long term capital gains. It is very likely there will continue to be favorable tax treatment of dividends (maybe LTCG and Dividends both at 20%) after 2012.

Apple isn't an investment conglomerate; it doesn't have as many ways to invest money as a company like Berkshire.

Part of the issue is that a good bit ($55b of about $80b as of September 2011) of Apple's cash is overseas, but it's unlikely Apple would pay out a large enough dividend to seriously deplete even the US cash hoard. There is an argument that Google, Apple, Cisco, etc. are all waiting for a special "5% tax on repatriated income" tax holiday in 2012+ (like in 2004) to bring back a lot of it. It's all income on which US tax has not yet been paid, so paying 5% vs. 35% would be a big win.

It is definitely up to Apple whether they do share buyback vs. dividend, but once your cash is clearly beyond

There is near zero chance Apple would make a $50-70b acquisition. They have never done that. If they suddenly deviated from their (successful) strategy, it would probably tank Apple's stock twice -- both less cash and an ineffective and risky use of the cash, distracting to Apple's core product, and would call into question both the executive leadership and the board of directors. I'd be surprised to see Apple make purchases beyond $1-5b, and even that would really be pushing it.

I agree with the parent - no way would Apple want to do a massive acquisition.

I also agree with the grandparent, Apple is unlikely to part with its cash soon.

All the cash is Apple's "war chest" - it's let them do innovative things with their supply chain (prepay for ~$1bn in parts to get a substantial discount), it's let them fight a massive patent battle (we'll see if this pays out), and gives them all sort of flexibility moving forward.

Could they do all of the above things with less than $100bn in the bank? Of course, but the massive cash hoard allows them to continue doing the activities above, even if sales/growth slow down.

Normally what you'd do at a mature company in a mature industry (oil, finance, etc.) is pay out 10-30% of your earnings, one or two times per year (or maybe quarterly). Apple would still keep (and keep adding to) its war chest.

Wall Street does heavily penalize companies which have started paying dividends if they ever cut the dividend (or end it), much more than it rewards companies for paying the dividend in the first place.

It's tricky -- tax policy (which does change over time), earnings, other uses of capital, and market expectations, all change.

"Part of the issue is that a good bit ($55b of about $80b as of September 2011) of Apple's cash is overseas"

This would probably be a great time to start iOS/OS X software companies outside the US. Give Apple something to spend its overseas cash on.

There is probably $2-3t in cash overseas in the form of deferred corporate profits, so US companies could do a lot of overseas acquisitions, indeed.

Without paying dividends, how is a stock any more an investment than baseball cards?

Capital gains

There's no rational reason for a stock's value to go up just because the company does well if it doesn't mean the company will pay out dividends. That's just baseball cards: i.e. your Alex Rodriguez card will be worth more if Alex plays well, unless for some irrational reason other baseball card collectors feel otherwise.

Wrong. I suggest you read up on the subject.

http://en.wikipedia.org/wiki/Share_price

Can you point out what in that article backs up your argument? I'm not finding anything relevant.

The actual rational reasons are,

1. If you get enough shares together you can influence the company's behaviour, (not relevant to most people)

2. If someone else wants to influence the company's behaviour they might be willing to pay for your shares, and

3. If the company goes under the shareholders might get something once it gets dissected (not really relevant to AAPL at the moment)

In the case of a company in which all control is held by a majority shareholder who intends to hold 51% forever, you're absolutely right - the valuation of the 49% is almost completely arbitrary, giving no control or ownership in a meaningful sense.

Is 3 ever relevant? Most failed companies go into insolvency and then bankruptcy, which means creditors walk away with it all.

1 and 2 are fair points, but with interesting consequences. By 1 and 2, it would be rational to invest in failing but promising companies, since they are more ripe for takeover. With a successful company like Apple, the profit-maximizing move from shareholders is to make sure they keep doing what they're already doing.

> There's no rational reason for a stock's value to go up just because the company does well if it doesn't mean the company will pay out dividends.

But the company is worth more (in real terms, not just market cap) and stock is partial ownership, so there is a reason. Just look at it in terms of assets - Apple has a bunch of stores and other stuff they didn't own 10 years ago. That stuff has value, the stock represents a portion of that value.

You are right that a huge part of this is pretty irrational, though. Hell, look what happened when Steve Jobs was rumored to have had a heart attack.

> stock is partial ownership

This is a nice idea, but it's not immediately obvious it should mean anything. If someone owns 1% of a company they may theoretically own 1% of its assets, but if they can't practically make use of those assets for personal benefit then that value evaporates.

Say I'm the director of a company. I own all of its shares and am the one-member board. As chairman of the board I appoint the CEO (myself) and in tandem with said CEO I make all decisions regarding hiring and pay. My company pays no dividends, and I've made it clear that I will never sell more than 49% of the company.

Now, the 49% that I might sell technically confers partial ownership, but it gives no control, no dividends, no benefit of any kind.

Say my company only does one thing: It invests in Company2, my other business. Company2 is run in exactly the same way as the first company of mine. Now, say I was willing to sell you 49% of the first company, and my first company (me) was also willing to sell you 49% of Company2. You'd own nearly 75% of Company2, but you'd have no control over anything.

I could keep nesting companies inside other companies until you effectively owned 99.9% of the company that did the actual work, but that's completely irrelevant - even if the company was worth billions, there is no logical reason that the value of those shares should be correlated with the value of the company. They might as well be correlated with the weight of the CEO, though they should probably be worth nothing at all.

I'm pretty sure partial ownership is only worth anything when it is relevant to a credible possibility of controlling ownership.

This is getting way over-complicated. Look.

When a company IPOs, ownership of that concern is split up into x pieces. The company has some amount of value, which is divided among the shares. As the company increases in value (hopefully), so do the shares. That is the reason why investing in a company is different than baseball cards. Baseball cards only appreciate in value due to changes in supply and demand, whereas a business can actively create value. There is no need to delve into weird counterfactuals or discursions on what the idea of partial ownership "means".

If a business's value can't be plausibly enjoyed by the shareholders, then the shares really are no more than baseball cards.

So far, the ways for a business's value to be enjoyed by the shareholders have been broken down to (a) dividends, (b) stock buybacks, (c) the ability to take control of the business, (d) the ability to sell stock to someone else attempting to take control of the business, and (e) claiming a share of the business's assets after dissolution.

(e) is right out--for a company that's doing well at all, their market cap is higher than the value of their assets less their liabilities, and a company doing poorly is certain to become insolvent before being dissolved. This is almost an intended feature of limited liability: the company can borrow itself to death, and the worst case scenario is that the stockholders get nothing.

(a) and (b) are stipulated as part of the original question--if the company doesn't issue dividends or buy back stock, of what value is the stock? Which leaves (c) and (d), which can be plausibly ruled out by having one intransigent party holding a majority share.

If a company has 100 shares on issue how is paying you $0.10 per share in dividends different from a buy back of 10 shares at $1 each.

Either puts $10 dollars into the pockets of shareholders and out of the hands of the company.

Dividends versus a buyback are the same thing except from a tax point of view.

If you choose not to sell that is like an automatic dividend re-investment plan.

Buybacks are fine too, but a lot of companies don't do either.

Not true. Marc Cuban has written an excellent blog post on this: http://blogmaverick.com/2004/07/20/microsoft-dividends-and-s...

Dividends reward you for holding a stock. Buybacks you when you sell the stock. I'd much prefer dividends, and if we had a better tax policy on them, I think you'd see companies do a lot less crazy #&*$ to expand into markets that they have no business in.

To expand on what beagle said:

1) owning stocks gives you some legal rights; in particular, management cannot spend the earnings as they wish (though in practice interests are rarely well-aligned). Also, if you control enough shares you might be able to make the company pay dividends.

2) more importantly, stocks tend to be more liquid than baseball cards. Though I'm sure there are counterexamples. :-)

> so paying dividends would be sending money out to shareholders, it gets reduced by taxes, and then the shareholders have to figure out what to do with it that would return as much as Apple would. The best return would thus be likely re-investing it in Apple shares.

Your answer is essentially fine, but:

1) There's no reason you should assume an investor would re-invest dividends in Apple as opposed to AcmeCorp. The resulting portfolio might be less risky than either all-Apple or all-Acme.

2) It doesn't take into account that investors are also consumers, i.e., they might choose to not re-invest the dividends at all, and instead "buy stuff". For instance, a retiree might use it to pay the rent.

3) Transaction costs for selling a stock vs receiving a dividend.

/nitpick

Indeed companies not spending or distributing cash is slowing US growth too. There are macrodisadvantages. And the complete aversion to paying taxes does not help the budget deficit.

Most dividends are taxed at the appropriate long-term capital gains rate, for now:

http://en.wikipedia.org/wiki/Qualified_dividend

I could be wrong here, but those rates appear to be just for the US. I think I read somewhere that only about half of what Apple has is sitting in the US ($66 billion comes to mind).