Return of the King

Apple is discussing what to do with its cash. Over the past five years Apple has been a cash machine. Although five years ago their principal products didn’t exist, the iPhone and iPad are now so popular that they generate three quarters of the company’s revenue. And profitability has been eye-popping: 25% of every dollar the company generates in sales flows to the bottom line as earnings.

As a result, they’ve built up a lot of cash—almost $100 billion. That means that $100 of their $535 stock price consists of cash and short-term investments. Now the Board is actively discussing its options. Unlike Steve Jobs, CEO Tim Cook has admitted that they don’t need all that money.

Well I have a suggestion: pay it out to shareholders. The company has been so successful at what it does that it makes little sense to make a huge acquisition. They’d just dilute their own growth. Shareholders have been rewarded so far with a higher stock price, but prices can fluctuate. Nothing transmits wealth to shareholders so effectively as a dividend.

The tax climate is supportive right now: the 15% dividend tax rate is under assault in Washington. Stock buybacks also reward shareholders, but only those that are leaving. Dividends reward owners that are staying.

A one-time dividend of $60-80 billion wouldn’t change Apple’s culture and wouldn’t affect their operations. They should take a lesson from Nike, and just do it.

Douglas R. Tengdin, CFA
Chief Investment Officer
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