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I hate to say this is a bad idea, but dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere.

Combining a stock buyback plan is smart at least because perhaps they can balance the two and counteract the dividend effect by buying up shares.

In reality Apple could probably just become a private company by buying back most/all the public shares, but I doubt they want to do that. There are obvious PR benefits to being the "most valuable" or "most profitable" public company in the world.

Also, as far as space travel and exploration, that makes no sense for Apple. Apple is not a company that invests huge in R&D projects that won't pay off for decades. It would ruin their incredible focus on what they are doing now and for the next 5 or so years. If you get too far out ahead, you build things the world isn't ready for yet or you stop executing on the here and now products and services.

Apple's still got a ton of room for potential growth on phones, pc's, and tv's. There are also a whole slew of "post pc" computing interfaces and devices that haven't even been dreamed up yet. Space travel would be a distraction.

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> dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere

this is exactly what they're trying to signal because its true. what's wrong with that? they've been extremely profitable while not spending the $45 billion they're giving back to shareholders, and they can continue to be profitable without it.

> In reality Apple could probably just become a private company by buying back most/all the public shares

no it couldn't. it's market cap is 550B. it's cash reserve is 100B.

more generally, a company cannot buy itself because the shareholders actually own the cash the company holds. generally, if a company has $X dollars of cash reserves, then the market cap on that company would be > $X.

edit: a factor of 10

You're off by a factor of 10 there but the claim is still true.

> the market cap on that company would be > $X.

Market cap != Value assets

The 550B market cap is the value of all outstanding shares of the company which is not equal to value of the combined assets like buildings and $$.

if the market cap of the company fell below the cash (net of debt obligations) of that company, the investors could liquidate the company, take the cash, and make a profit. thus, it's pretty atypically for market cap to dip below asset value, and even more atypical for market cap to dip below cash holdings.

Apple came pretty close in 1997 when they had $380 in cash and a market cap of 2.2B but their LT debt was growing fast. ~1B at the time.

Source: http://www.businessweek.com/1997/34/roster34/aapl.htm

Actually, finding companies whose market cap is less than asset value is a great way of insuring you're buying shares at a discount. This is pretty rare in technology companies, which are generally valued far above assets, but it's possible to find this sort of thing in more predictable sectors.

For more information, you could look at Benjamin Graham's "The Intelligent Investor". This is a very good introduction to investment, but it's also quite a long read.

Often it means the assets are mispriced (banking stocks....)

So? To "make company private" you have to buy the outstanding shares. 550B+

Yes, at a premium. For example Alibaba announced last month it would buy back its shares at a 46% premium.

Not to mention the inherit problem of trying to corner a market. It would be hard to buy the shares back without prices being driven up....https://en.wikipedia.org/wiki/Silver_Thursday

I just want to point out that the amount of cash it takes to take a public company private is not equal to Shares * Market Price.

It's actually Float Shares * Market Price.

This doesn't make much of a difference in Apple's case, because most of their market share is floating on the public market. Quick calculations:

932.37M Shares Outstanding x ~$600/share = $559.4B Mkt Cap

931.79M Float Shares x ~$600/share = $559.0B Price to go Private

$400mm, in this case, doesn't make much of a difference, but if you talk about this for other companies in the future, keep it in mind.

Source: http://finance.yahoo.com/q/ks?s=AAPL+Key+Statistics

But you only have to have 50.1% of the shares to force the other 49.9% to let you go private :-)

Serious question: wouldn't the SEC say "no way" if that 49.9% constituted more than 500 (at least, I believe that's the number) people?

Yes.

if (NumOwners >= 500) public = true;

Actually, I think the rule is >500 investors, you have to publicly disclose financials a la Sarbanes–Oxley Act.

Different than being a publicly traded company.

No, they'd just require the private company to disclose the same sort of quarterly information that a public company does.

You're clearly alluding to Facebook being "forced" to go public, but they too could remain private with 501 investors. But once they're revealing their numbers, they figured they might as well jump in with both feet and do the IPO.

Typically when a company goes private, it buys back the shares from the current shareholders. The number of shareholders would then drop back under 500.

You omitted the premium shareholders would want from Apple to agree to sell their shares back to the company.

Even with the dividend and share buyback plan, Apple is expected to continue to add significant amounts of money to its cash balance, which stood at $97.6 billion at the end of 2011.

If Apple consumes about $15 billion a year in cash for its stock buybacks and dividends, it is generating so much new cash from its business that its total cash balance at the end of fiscal 2013 could be around $180 billion, estimated Gene Munster, an analyst at Piper Jaffray.

http://www.nytimes.com/2012/03/20/technology/apple-to-use-ca...

I disagree with your assessment of dividends vs. share buybacks. My opinion mirrors that of Mark Cuban. A few choice quotes from [1]:

Dividends offer _true_ returns:

They send a message to shareholders that you want them to stay as shareholders and are rewarding them for their committment to your company. Its a reminder to shareholders that the business investments you have made have actually worked and the reward is that cash can be returned to shareholders . That profits are more important to shareholders over the long term than trying to convince wall street to increase your PE [via buybacks].

Meanwhile... buybacks just perpetuate insider dilution:

Companies continuously issue new shares to their managers without asking their existing shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution of existing shareholders’ stakes, death by a thousand dilutive cuts. If that isn’t a scam, I don’t know what is. Individual shareholders have nothing but the chance to sell it to the next sucker. A mutual fund buys one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six weeks later you own less, and all that money went to insiders, not to the company. And no one asked your permission, and you didn’t know you got diluted or by how much till 90 days after the fact if that soon.

[1] http://blogmaverick.com/2006/07/22/executive-pay-and-stock-p...

This is an interesting point of view, but the article you linked to misses a fundamental point of the "golden parachute" offered to CEO's: if a leading executive messes up, you want to incentivize them to come forward, not to cover up their mistake for fear of losing their jobs.

Is a golden parachute ideal for this? Perhaps not, as it does introduce some strange incentives overall; but I'm not aware of anything better.

I have no idea how golden parachutes relate to a discussion of dividends vs. stock buybacks. Enlighten me?

Parent's article discusses why stock buybacks damage shareholder value, by referencing the ability of executives to generate shares and sell them on the open market, and thereby dilute existing owners without their consent. (Note that I'm summarizing the argument, not agreeing with it.)

Yes your right apart from the endge cases of Investment trusts where you can use buy backs and issusing shares to manage the discount/premium.

The quote describes stock grants and stock options for managers (and employees). That's orthogonal to the question of dividends vs buybacks.

An individual investor might prefer dividends for tax reasons, while a mutual fund might prefer buybacks. But other things being equal, both sorts of investors don't want unnecessary dilution.

Do they not have to pass a motion at the AGM to disallow premetion rights to issue new shares?

Without either dividends or a stock buyback plan, stocks are no more an investment than baseball cards. The point of not paying dividends is so you can reinvest your cash to increase the dividends you can pay later, and Apple's dividend is so low that they're clearly planning to reinvest the vast majority of their cash even with these dividends.

I don't get the criticism that Apple has no better way to spend its money. It's been building a cash stockpile for years, so obviously they've had this "problem" for years. They're a public company that has to report the size of their cash stockpile every quarter; having a growing cash stockpile already signals they haven't found a way to somehow reinvest their cash. Paying a dividend, especially such a small one, hardly lets the cat out of the bag at this point.

Furthermore, interest rates are still rock-bottom. If Apple suddenly needed a whole bunch of cash to invest, it wouldn't be at all difficult for them to borrow at much, much lower rates than their rate of return. It might be more risky and costly than simply spending a war chest, which is a good reason to keep 55 billion around (plus whatever they pull in over the next three years) while distributing the other 45 billion.

Well put, I think that Apple has been working on this for months and they have a pretty good idea of what they're doing. They have worked out a very conservative amount of money to give back, and still have plenty to keep in the warchest for any R&D or M&A. With $55 billion around, they could outbid Microsoft on any acquisitions that they want (I think MSFT has close to $40 in their chest, but don't quote me on that). And before you mention that Apple is not known for acquisitions, they're also not known for buy-backs and dividends; Tim Cook might be shaking things up how Apple is doing this from a business perspective

When I collect all of the Tops '88 baseball cards, I don't suddenly own the NY Yankees. Stocks have fundamental value beyond novelty.

Unless you are a significant shareholder, your "fundamental value" is lost in the noise.

Apple's cash reserves grew about $30B last year, they're announcing that they're going to spend $45B over the course of 3 years. Assuming the current cash reserve growth continues at the same rate, I really don't think the market will look at the dividends as not knowing how to spend their money...

They know how to spend the money they have. The "problem" is that they keep making tons more.

Both dividends and repurchasing are ways to distribute money to shareholders, and are from the point of view of the Miller--Modigiani theorem equivalent: from this abstract viewpoint, neither should affect the value of shares.

The differences are

1. Buybacks are usually more tax efficient, because with dividends, profits are realised at the point of sale;

2. Buybacks tend to be procyclical, since companies get a bargain when their shares are undervalued and overpay when they are overvalued. There is some evidence that overall, companies do not get good value for their shareholders from share buybacks. Also, many stock options have the effect that buybacks reward shareholders better than dividends.

I think a mixed dividend and buyback policy is wise. Apple shouldn't be hoarding the cash, and they shouldn't make poor value acquisitions.

To take themselves off the stock exchange, they would need to issue bonds valuing around $500 million, and so become a highly indebted company. This would be tricky, and it is not obvious why this would be in Apple's interest.

they would need to issue bonds valuing around $500 million

$500 _billion_

There are institutions, e.g. pension funds, that only invest in equities that provide a dividend. By offering a dividend, Apple is making its stock more widely available => more buyers => more shareholder value.

I laughed when I saw this in the press release. Anyone conservative enough not to buy a stock unless it provides a decent dividend would not buy Apple. Apple is not a value stock.

Wow, a downvote brigade for calling Apple a growth stock? There must be lots of MS fanboys here, or Apple fanboys who don't know that the opposite of "value stock" is "growth stock".

With a P/E of 16.87, AAPL a growth stock. Or overvalued. With a P/E of 11.71, MSFT is value not growth. With a P/E of 135.1, AMZN is ... pricy.

It isn't uncommon for management to partner up and take a company private when they are already large shareholders. In the case of Apple, this is not the case. Jobs owned more of Disney (almost 8% via the Pixar deal) than Apple on a percentage basis (less than 1%).

What are their other options other than simply accumulating cash and not being able to spend it versus a dividend. Having a war chest is nice, but at a certain point it's being wasted if you could basically buy any company on earth tomorrow if you wanted.

That's how I saw it, however I think the remaining ~$40 billion is sufficient to continue a dominant position in where they excel. Things only evolve so fast, and unless they were planning on extending into specializing into other markets, there's only so much money that can be spent in one area before you'll potentially extend yourself into other areas too much and dilute expertise/focus. Apple's brand can't dilute too much either, though there are some areas I can see them being able to excel in - but they might not have the total foresight or incentives needed to maintain dominance in those areas, as experts already exist in those fields and they'd be competing for human resources - they do have ~$40 billion left + will surely make many more billions to use however they please.

>"dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere."

In Apple's case, what it signals may be a little worse - i.e. that they have given up on trying to find those better ways despite having had several years to work on it as the cash accumulated.

If Apple had announced dividends a year ago, before Jobs' death, it would look like Apple had a long term vision - and there was certainly opportunity to have provided dividends.

More importantly, there was opportunity to spend the money. If Apple couldn't figure out how to make a dent in $30 billion or $50 billion or $70 billion, it doesn't look like their problem has gotten any easier.

It's pretty simple when you think about it. Apple has a certain hurdle rate for their projects that is extremely high, when compared to other companies. The only projects that can make it are ones that can draw on their existing resources. For them to go into something completely new would aberrate from their investment philosophy that has made them the most valuable company. On the new product front, I have more confidence in Apple knowing that they plan to think things through rather than announce something just for the sake of spending their hard earned cash.

Relevant bit from pg's keynote:

"I was talking recently to someone who knew Apple well, and I asked him if the people now running the company would be able to keep creating new things the way Apple had under Steve Jobs. His answer was simply "no." I already feared that would be the answer. I asked more to see how he'd qualify it. But he didn't qualify it at all. No, there will be no more great new stuff beyond whatever's currently in the pipeline."

Looks like they probably won't be dreaming up innovative devices anyway unless a new Steve Jobs takes over.

Despite the fact that you're writing on a website written by one of the two people whose opinions you're quoting, I really don't think extrapolating the future based on two opinions is going to fly here.

"In reality Apple could probably just become a private company by buying back most/all the public shares, but I doubt they want to do that."

They can't use the shareholders' money (which is what this is) to take themselves private. You can't buy something from someone with their own money.

EDIT: Any of these downvoters care to explain themselves? Apple can't buy back most/all of the public shares using this pile of cash, because it belongs to Apple, which belongs to its shareholders. (Even if they could afford to do it, which they can't)

A public offering is the company saying "here is ownership in exchange for your money". A share buyback is the company saying "here is money in exchange for your ownership."

You're getting downvoted because it doesn't make sense for a company to be able to move in one direction, but not the other.

Right, they can buyback, but no matter how far they go in that direction they won't end up as a private company.

The shares they purchase don't transfer the ownership they imbue to the board of the company -- they are either retired, held as treasury stock or given to other shareholders. The majority shareholders remain majority shareholders of a smaller amount of stock.

To think of it in a very simplified way, if the company bought back all the shares except 10 from some staunch holdout, that guy would own 100% of the shares of Apple, (and each share would have a stratospheric price).

For the board/management to take control of Apple from the shareholders (which is what people mean when they talk about going private, really), they have to personally acquire more shares.

They obviously can't do this with the company's money, because shares bought with that transfer to the company and either dissolve or are transferred. They have to use outside finance to do it.

This is what I mean about you can't buy the company from the shareholders with their own money.

(They could in the simplified world use the money to buy back the stock and grant it all to board members, but in this world there is a tonne of legislation preventing this, and if they did it to take control out of the hands of shareholders they'd be open to action.)

The key part about offering dividends is you start to attract the people who only buy stocks that pay dividends. It's a substantial category.

The stock buyback sends exactly the same not-great message that the dividends do.

> I hate to say this is a bad idea, but dividends signal to the market that you have no better way to spend your money than just giving it back to investors to spend elsewhere.

The ever-present notion that the leadership team of what is now one of the largest companies in the world has no real idea what they are doing is fascinating to me. Perhaps they deserve a bit of credit.

Getting good returns from a 100 billion dollar investment is hard. Just as an idea of scale that's enough money to more than double world wide fusion research spending for the next 30 years. Suppose they started down that path and 20 years from now started building useful and highly profitable fusion reactors that beat coal power plants. Now what if that failed. Measuring the risk / benefit curve on such an investment is hard. But, Apple could afford to fund 5 other projects on that scale without touching their cash horde.

IMO, Apple starting down the dividend path is simply the only reasonable course when faced with that sort of cash flow.

> Getting good returns from a 100 billion dollar investment is hard.

You don't play with 100B in the same way that you play with 100K.

There are few times when a really compelling buyout opportunity emerges. And it is at those times that you want the warchest. Until then, you need to keep the dry powder.

As an example, Buffett wouldn't be able to negotiate the really sweet deal with BofA last year (5B, paper profit ~ 2.8B at the onset) without the cash balance.

I don't think this hits their warchest at all. The # I heard on NPR this morning was about 2.5B/Quarter, but their profit is about 13B/quarter. Even with a 10B stock buyback plan, that's not quite a quarter of profits. Disregarding the buyback, they should still be adding to their warchest. I believe it's only when they announce a special, one-time type of dividend that it signals they don't think they will have anything to do with the money. For example, Ford basically did that a few years ago (although in retrospect 10B in electric research or something might have been wiser).

You're right. Apple has so much cash that the only thing that makes sense is to both pay out quarterly dividends AND buying back their stock. Even though AAPL is still considered a GROWTH stock.

NOTE:

Apple earned ~$13b profit last quarter and it's only going to grow. $15b x 4 quarters = $60b PROFIT PER YEAR.

They can easily afford $45b over the next 3 years considering they have more money than God.

They're riding a hit. I know this borders on heresy here, but the iPhone/iPad ecosystem is really just one very good product that hit an amazingly lucrative sweet spot in an emerging market. They're printing money with it because they got there first and best (c.f. Microsoft), not because their "leadership team" is reliably able to produce hit after hit.

Even Jobs only really got one money-printing-quality hit like this in his career. Most of "his" other stuff was great, sure, but mixed with equally great competitors (Pixar -- Toy Story was huge, but so was Titanic) or never managed to break into the market due to bad timing or market conditions (Mac OS).

Seriously: if all that Apple can do with that $100B is produce a top flight movie studio or a distant-second competitor to an established monopoly, it's not enough. They should give the cash back instead.

Pixar wasn't a "money-printing-quality hit" because other studios make a lot of money on some movies too?

Titanic's studios have had plenty of flops and shitty movies to offset their successes. Pixar has had a string of commercial and critical successes.

Pixar didn't enjoy iPhone-like profitability (edit: that's not the same as revenue, everyone knows that, right?). And the reason is that it had very successful competitors. The Mac likewise. That's not good enough. Apple investors can make their own decisions about buying into new products like that. The GP post was implying that the "leadership team" was likely to do better.

My point is that (1) no, they really can't product another iPhone-like hit (that's a once-a-generation thing) and that (2) Jobs is dead, so there's a serious question about the "leadership team" that investors need to see as a risk. Is it really "safer" to leave your share of that $100B egg in one basket, or just to put it into a mutual fund?

> Pixar didn't enjoy iPhone-like profitability.

Personally, I'd say Pixar seems to be the Apple of the movie industry. A few products, done right, and hugely profitable:

> As of February 2012, its films have made over $7 billion worldwide, with its $602 million average gross by far the highest of any studio in the industry. In addition all the films produced by Pixar are among the fifty highest grossing animated films of all time, with Finding Nemo (#26), Up (#43) and Toy Story 3 (#7) all in the top 50 list of highest-grossing films of all time. - http://en.wikipedia.org/wiki/Pixar

> My point is that (1) no, they really can't product another iPhone-like hit (that's a once-a-generation thing)

They've already put out three in a generation - iPod, iPhone, and iPad. Lumping those three distinct systems into one is intellectually dishonest.

And... the expected Apple fan flames have begun. Pixar, iPod and iPad didn't have anything like the iPhone's level of profitability. I lump the latter in with the iPhone because the current implementations are one platform (no one calls it, ahem, "intellectually dishonest" to talk about "windows" profitability instead of "windows home" vs. "windows server" numbers).

But there's no need, so I'll simplify. If all Apple can do with that $100B is generate another Pixar, Macintosh, iPod or iPad, it is not enough and they should give the money back. To make it seem like a good bet, they need to produce another iPhone. And they can't, because no one can do that at will. We'll see another hit like that in 15 years or so if we're lucky.

How about Siri?

The iPhone was the next step in omnipresent computing. You always have your iPhone. It's two steps down from laptops (leap-frogging the tablet, which has come after the iPhone). The next step is either glasses with computer screens (kind of geeky), or voice-interface computers.

With a voice interface, you can shrink a computer down to the size of a wristwatch. Getting data out is a problem (display glasses? some kind of projector?) is an issue, but not insurmountable.

15 years doesn't sound crazy.

My understanding is that Apple bought the technology for Siri rather than developing it in house.

They may have bought the technology but they definitely improved on it across the board while integrating it into iOS.

> To make it seem like a good bet, they need to produce another iPhone. And they can't, because no one can do that at will. We'll see another hit like that in 15 years or so if we're lucky.

http://www.codinghorror.com/.a/6a0120a85dcdae970b0163030a719...

> Pixar didn't enjoy iPhone-like profitability.

You can't really compare iPhone and Pixar that way. IPhone was a product by an established company that was already producing the iPod. Pixar on the other hand was a startup (sort of), which Steve Jobs invested $10 million in and sold for $7.4 billion, quite an impressive return on investment.

This completely misses the point (or rather: completely confirms what I'm saying). The question at hand is "What should Apple do with $100e9US". What relevance does an investment of 0.01% of that total have, even if they could get that RoI on demand. With (pinky to mouth) One Hundred Billion Dollars you need to be aiming much, much higher. And they aren't. And even if they could they're just a bunch of Jobs-less yahoos playing with cash that landed in their laps. Be honest: they aren't going to create ten thousand Pixars with that money, they'll be lucky to get five. And they can fund five (or fifty) on existing revenue without the cash reserves.

Give it back.

What's with this idea that they have to pick one and only one thing to do with a hundred billion dollars? What's with this idea that they should spend it all so they don't have any reserves?

I'm not sure. Depends on if you count the iPod, iPhone, and iPad as 1 or 3 products. the 2006 iPod seemed very different from the 2007 iPhone. To my mind, those are different things. I can see the desire to blur the iPhone and iPad, it's just a change in form factor. Thinking back, not many people thought tablets would take off. They seemed sorta like 3d tv.

Although I do not completely disagree with you, Apple's leadership team has reliably produced hit after hit in the last 10 years: iPods, iTunes, Macbooks, iPhones, iPads, app store, etc. That doesn't mean this success will go on forever, but right now, Apple is batting pretty well.

I was right about Apple's plans to repurchase its own stock. I guess I was a little surprised by the quarterly dividend and the amount of money it plans to spend ($45b over 3 years).

Then I realized Apple earned $13b profit last quarter and it's only going to grow. $15b x 4 quarters = $60b PROFIT PER YEAR.

Not all of their profit will be used for the share buy back/dividend, but Apple can easily afford it and still have MORE cash (specially after you factor in cash inflow from its investing activities).

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