Mac news from outside the reality distortion field
He will ignore the latest call for Apple to share its huge cash hoard as he ignores them all
Apple's growing stash. Source: asymco from company reports.
Most of the arguments for and against the open letter to Apple's (AAPL) board of directors issued Thursday by Bernstein Research's Toni Sacconaghi have already been made. (See here and here.)
Sacconaghi's polemics against Apple's policy of holding on to its profits -- rather than distributing them to its shareholders -- tend to pop up like Sweet Williams every two years. In the 22 months between his Oct. 2008 call for a stock buyback and his July 2010 call for a buyback and dividend, Apple holdings in cash and marketable securities have grown from $24.5 billion to $46 billion -- highest among all U.S. listed companies, as Sacconaghi is at pains to tell the board, and greater than the total market capitalization of all but 49 of the S&P 500 companies.
"In our conversations with shareholders," Sacconaghi writes, "one common source of frustration -- which is now bordering on exasperation -- has been Apple's burgeoning cash balance and the company's unwillingness to return it to shareholders or discuss its vision for how the company plans to use it."
Here's what Sacconaghi -- and most of the commentators -- is missing. He writes as if Apple's shareholders owned the company. While this is technically true, and it's certainly the way investment advisers talk to their clients (see, for example, here), it's clearly not the way Steve Jobs sees things.
Jobs, you will recall, was ousted from Apple and had to sell NeXT in part because as a young entrepreneur he paid insufficient attention to the bottom line. When he returned to Apple in 1997 the company was, according his recollection, three months away from bankruptcy. Since then he has treated Apple's growing cash hoard like a starvation survivor treats food in the larder -- something that could disappear at any time.
"We know if we need to acquire something -- a piece of the puzzle to make something big and bold -- we can write a check for it and not borrow a lot of money and put our whole company at risk," Jobs said in February, the last time a shareholder asked him publicly why Apple didn't pay dividends.
"The cash in the bank gives us tremendous security and flexibility."
And he's going to keep it that way, no matter how loudly the shareholders -- or Toni Sacconaghi -- complain.
ADDENDUM: Reader Dave Bernard, who knows a thing or two about taxes, adds this twist:
"One thing Sacconaghi doesn't mention is that Apple couldn't return the full $46 billion to shareholders even if it wanted. Much of its cash (around 50%, per the latest 10-K) has come from overseas profits, which are often taxed at a rate less than the U.S. federal income tax rate. If Apple were to repatriate overseas "earnings & profits" (tax technical phrase), it would have to pay U.S. tax on it. Sacconaghi doesn't seem to realize that doing this would cut into its cash hoard, increase the company's effective tax rate and reduce current earnings.
Conceivably, Apple could owe $5 billion+ in cash for U.S. taxes if it were to bring back all the overseas cash to pay a dividend to shareholders. That includes about $2.5 billion+ in cash taxes that have likely been accrued in earnings through the latest quarter (i.e., have already hit the company's bottom line), and another $2.5 billion+ that could reduce earnings once Apple decides to bring it back. It's tough to pin down exact numbers using public filings, especially given the complexity of the tax code, but this is very likely in the ballpark.
What's really interesting is that even as Apple's earnings have risen 75%+ year over year during FY 2010, the company's effective tax rate has been tracking lower this year than historically, which suggests Apple's earnings in low tax jurisdictions outside the US have risen dramatically. This means the cash and earnings costs of the kind of distributions that Sacconaghi is recommending are getting bigger, not smaller, at a pretty rapid pace."
Bernard is the former vice president of taxes at Kimberly-Clark and past International President of the Tax Executives Institute.
[Follow Philip Elmer-DeWitt on Twitter @philiped]
Dividends are a parasitic mechanism.
Think about it. People who don't do any work and are not employees or officers of the company are getting free money.
Dividents make stocks resemble a form of secured debt, like a bond.
Bond yields make sense because that's the premium you charge for lending money.
Equity isn't lending, so why should it pay yields?
A company should reinvest its profits in itself, and use them to reward its employees.
I certainly don't want any company I work for to pay dividends to some gambling good-for-nothings.
I'm puzzled by this whining that "Apple should reward their shareholders". What, the fact that their shareprice has gone through the roof is not reward enough?
And what about this comment from Sacconaghi (spelling?):
"has been Apple's burgeoning cash balance and the company's unwillingness to return it to shareholders or discuss its vision for how the company plans to use it."
Return the money to shareholders? Does he mean that investors gave that money to Apple, and Apple should now give it back? Hate to break this to you, but that money did not come from investors, it came from people who bought Apples products! Apple doesn't get one dime when investor buys Apples shares on the market.
Besides, I bet that if Apple did give out tens of billions in dividends, their shareprice would go down. It happened to Microsoft. So how exactly would that help investors?
Add me to the current stockholders who are holding Apple long and who trust them to make the best investment decision. We realize it is our money being held by and invested by Apple. Every year that passes the bucket of profit is added to and the whole bucket is reinvested for us by Apple. In ten years, what's that "bucket" going to be worth? If the "spread" between Apple's stock price and it's cash keeps growing, eventually it would be equal to the price of it's stock. Now THAT would be a dividend!
Hey JDF
When less than knowledgeable people bring up the $150 million that Microsoft paid to Apple back in 97, they always say it was a lifeline to Apple but they never remember to explain that it was a courtroom induced settlement for Microsoft getting caught stealing Quicktime code to make Media Player function.
Interesting huh...
Like many high flying tech companies, including Microsoft, Intel, Cisco, and Oracle -- Apple does not know what to do with its vast cash/investments that are often matched by NO DEBT. This is a relatively new phenomenon in business, and technology, particularly Silicon Valley, is leading the way. How to use this money for the welfare of the company, society, stockholders, etc. is an issued that most parties are still avoiding. In the meantime, the Cash w/o debt piles up. In a way this is a very positive development for the world, and an indication of future potential along these lines. Some call it "self-multiplying" money in the world. For now however we must understand its deeper purpose and meaning, as well as figure out it can best be used.
@jdf--Also, why don't people also mention Prince Alwaleed bin Talal bin Abdulaziz Alsaud's 5% purchase of Apple shares around the same time and his bid to stop Oracle from buying Apple at the same time?
The MSFT $150M was the most public at the time, but hardly the largest or the most important.
PED, why is it that when people talk about Apple's phenomenal recovery they forget to mention the $150 million life preserver Microsoft threw them back in 97?
I, for one, am quite happy with the status quo. I bought 100 shares of Apple in 1998 for a total of less than $3000. Two splits and eleven year later those shares are worth over $100,000.
Everybody criticizing Steve Jobs' management should be forced to cite an example proving their method will be superior in outcome.
Good luck with that.
I'll take my dividend(s) in the form of a skyrocketing stock price, thank you very much.
to Randy B. in Boca Raton
Some people invest long term in strong insightful companies, others become insomniacs dreading poor short term investment decisions and make their brokers wealthy.
I'm the former, you're the guy the later keep feeding.
Tony S wants Apple to improve its stock price through financial engineering. Apple wants to improve its stock price by growing the companies revenues and earnings organically - building great products and selling them.
As between those two philosophies, I am much more comfortable with building great products and selling them.
It is not a surprise to me that the call for financial engineering comes from a wall street guy - that is the thinking on wall street that led us to the entire melt-down.
Didn't we learn with the wall street meltdown that financial engineering might be able to artificially create short-term profits, but sooner or later the house of cards collapses?
To: Ferver and Bob Forsberg
I've been in the investment business for more than 40 years and I've had clients refuse to sell stocks hoping to get that unrealistic number they have in their head. Only to watch the value of their portfolio slowly deminish in value as everyone else sold out. The time to get out of a stock is when everyone is still talking about it, when everyone is trying to convince someone else how good a buy it is at this price. Apple is #2 in market capitalization, but ranks #12 in net income. Apple reached the high it had a couple of months ago on enthusiasm for their hyped new products. It hasn't gone any where since, and it won't because the big guys are slowly sell out of their positions, leaving the few waiting for $300 or $400. And Bob, not that I doubt you bought 12,000 shares AND still have it from $14 (you must have been in a coma), but for every person like you there are 20,000 that bought the stock at $275 and are waiting for someone to push the stock higher to get them out.
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