About that Apple Dividend/Buyback

So Apple has finally decided to pay a dividend and buy back some shares.  It’s about time. As a long-time Apple shareholder, I’ve been waiting quite some time for them to do something with their $100+ billion of cash lying around earning 1%.  I was never cynical enough to fully buy into Karl Smith’s hypothesis that Apple’s management was selfishly hoarding the cash at the expense of shareholders (a thesis which Smith admirably admits was proven wrong today–also, awesome graphic!).  Still, I also didn’t see the point of Apple holding onto all that cash earning an incredibly low rate of interest.  One of the most basic rules for management is that if your shareholders can earn a better rate of return on your firm’s excess capital than you can, you should return that capital to the shareholders.  That describes Apple’s situation perfectly–although in this case, it’s not because Apple doesn’t have any profitable investment opportunities but that Apple has such an incredible amount of cash that it has  run out of ways to use it.

Although I’m happy about Apple’s announcement, no, USA Today, shareholders will not get richer or make more money because of the announcement.  An otherwise fine article led with the fallacy that Apple’s shareholders will be making more money because they’re going to be receiving a quarterly dividend.  Nope–they owned the money as Apple’s shareholders before the dividend and they’re going to own the money after as well, albeit separately from their shares.  That’s why, in theory at least, after the dividend is paid out, the share price should decline by the amount of the dividend.  Now, after the dividend, if they invest the cash more profitably than Apple had been investing it, they will be making more money but there’s nothing about a dividend or a buyback that inherently makes a shareholder money.

Even with the dividend and buyback, though, Apple is still going to have a ton of cash.  I wouldn’t mind seeing Apple make an acquisition or two.  Barry Ritholtz makes a pretty convincing case here for Apple buying Twitter.  My roommate thinks that Netflix would be a good buy and relatively cheap for Apple–although this is true for most companies when  you’ve got the amount of cash that Apple has.

Lastly, although I agree with Felix Salmon’s favorable view of the dividend, I think he misses a few points when he’s critiquing people calling for Apple to issue debt at the end of his post.  He writes, “Having a cash pile and issuing debt is a bit like having a CD and running a balance on your credit card: idiotic.”  Try telling that to Google, which issued $3 billion in debt last May even when it had $35 billion in cash and marketable securities.  There are plenty of reasons why a company might issue debt even if it has cash.  If borrowing costs are really low and you have a way to use the money now (or in the future) that will earn a greater return than your interest payments, by all means issue debt.  Even if you have cash now, you may want to lock in low current borrowing costs in case you need the capital in the future.  In addition, when a company has a lot of cash on its balance sheet but that cash is being held abroad, it may make sense to issue debt in the U.S. to avoid the taxes which would be paid on repatriated profits.  (And I think that this actually applies to a fair amount of Apple’s cash).  I actually agree with Salmon that Apple shouldn’t issue debt, but that’s just because Apple has so much cash (did I mention how much cash Apple has?), not because companies with cash shouldn’t issue debt.

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