Apple Preparing to Offer 'Significant' Dividend for Investors Early Next Year?

[Arganos0]

Actually company value is determined by the projected future free cash flow available to shareholders in the future. While the shareholders may not actually get the money in cash, they do have a claim to the cash flow. In theory, on an annual shareholders' meeting, by means of a proxy enough votes could be gathered to ensure the company has to do exactly what the shareholders want. Of course this is tedious, and is in practice rarely done, but in theory it is possible.

Now of course, equity holders (shareholders) have a secondary claim on the assets of a company after debt holders. The equity holders have a direct claim on what remains after paying off the debts. Often the company reinvests this money and it's called Cash Flow for Investing Activities. The point is that legally, and in principle, this belongs to shareholders. The point it's all about the (perhaps hypothetical) legal claim. There doesn't have to be an actual cash distribution to value a company. Instead, valuation is done with the cash that could have been accrued to the shareholders had they collected their votes and voted.

Source: Berk and Demarzo, Corporate Finance, part on valuation (can't recall edition, was a while ago since I took the course)

 

[divinox]

No. You don't. You have zero access to that theoretical 1% of the assets that you seem to think you own. All you own/have are pieces of paper that cumulatively say you own 1% of the outstanding shares, and (probably) voting rights. Your only access to cash is to sell your stock.

A $100 bill is too just a paper. If the company isn't ultimately owned by its owners, who owns it?

 

[divinox]

Ok, some Finance 101:

In a perfect world, with no frictions and taxes, for the shareholder of an exchange listed company it would not matter whether the profits are made through capital appreciation or dividend payout. If a company does nothing the share price stays as it is. Theoretically, if a company pays a dividend, the payout makes the firm worth less and this should be accompanied by a decline in market value equal to the value of the dividend (or its present value, depending on timing issues).

Investors can achieve a homemade dividend by selling an amount of shares that equals the cash value of the dividend. They can reinvest the money in other securities if they want for a different payoff.

This together is part of what is called the Modigliani-Miller Theorem, or the Capital Structure Irrelevance Theorem. Money isn't 'returned' to shareholders since it is paired with a decline (or 'lack of increase') of the stock. As such the investor is not better or worse off if dividends are paid.

In the real world, dividends may or may not create additional shareholder value. If dividends are taxes at a lower rate than capital gains, then it might be beneficial to the shareholder to receive this money as a dividend. If capital gains taxes are lower than dividend taxes, it might be best to sell shares and create your own dividend by selling shares.

There is one other relevant idea related to dividends related to 'signaling' management expectations on the future prospects. The theory states that a company that starts to pay dividend has confidence in its future ability to keep paying these dividends and thus management expects to make profits in the years ahead. However, this is a widely debated topic as it might also mean that management is incapable of deploying the capital against a sufficiently high rate of return to be of value to shareholders. As a company grows, diminishing percentage return on capital may a factor.

One case maintains a given share percentage, the other decreases it. Certainly this matter. If not, A and B list stock would be valued the same, for example.

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You've missed the point again. His only access to that 1% of aapl assets/cash within aapl that he thinks he owns is through sale. Obviously there are many ways to extract value from the value of the shares (selling options the mist obvious), but not from the entity.

Out of curiosity: what happens in your world if 100% of share holders opt to liquidate AAPL?

 

[Arganos0]

One case maintains a given share percentage, the other decreases it. Certainly this matter. If not, A and B list stock would be valued the same, for example.

Example: company is worth 100 million. 100 million shares @ 1 USD outstanding. Company pays dividend of 10 million, or 0.1 USD per share. Company value as such decreases to 90 million USD, and the share price declines to 0.90 USD from 1 USD. 0.10 USD are paid out as dividend, leaving the investor with a total capital of the amount of shares * 0.9 + amount of shares * dividend = amount of shares * (0.9 + 0.1) = amount of shares * 1 USD, just like in the first scenario.

If you hold ten million shares (total val 10 mill), and a dividend is paid out of 1 mil, the ten million declines to nine million, and is compensated by the dividend, leaving you with a total of 10 million.

Say you hold a ten million shares @ 1 USD and you do not get dividend. You sell 10% of your shares, holding 9% instead of 10% of the company. Then you hold 9 million in shares and 1 million USD in cash.

Conclusion: you either hold a higher percentage of a lower valued company, or a lower percentage of a higher value company. Dividends are irrelevant if one does not look at taxes or frictions. I really suggest reading Modigliani Miller fur further clarification. I am sure there are better explanations than the one I have provided.

 

[mccldwll]

I wish you would try telling someone in finance that above sentence and see how they react to an idea that is completely contrary to the most fundamental concept of valuation. Well, you already have, and I'm telling you it's wrong, but I'm getting a bit bored correcting you on the same issue, so unless we're going to shift to a different area of finance, I've said my piece.

Again, you isolate things out of context for purposes of your silly argument. My entire statement was:
"The price of a growth stock most certainly is not determined by anticipated future cash flow to the stockholder. That should be clear since there is zero likelihood of any cash flow to the shareholder for the forseeable future. (that also would be circular reasoning since the only forseeable cash to the shareholder would be the through sale at the future price). The price is determined by expected earnings of the entity. An expectation of the return of invested capital certainly is true in any investment. However, with publicly traded stocks, the expectation of return of investment plus any profit is through what I believe you previously called an "intermediary step"--sale of your stock."
I seriously hope no one here believes what you've continued to post since your biz 101 theory is far removed from how it works and how stocks are valued in the real world.

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Actually company value is determined by the projected future free cash flow available to shareholders in the future. While the shareholders may not actually get the money in cash, they do have a claim to the cash flow. In theory, on an annual shareholders' meeting, by means of a proxy enough votes could be gathered to ensure the company has to do exactly what the shareholders want. Of course this is tedious, and is in practice rarely done, but in theory it is possible.

Now of course, equity holders (shareholders) have a secondary claim on the assets of a company after debt holders. The equity holders have a direct claim on what remains after paying off the debts. Often the company reinvests this money and it's called Cash Flow for Investing Activities. The point is that legally, and in principle, this belongs to shareholders. The point it's all about the (perhaps hypothetical) legal claim. There doesn't have to be an actual cash distribution to value a company. Instead, valuation is done with the cash that could have been accrued to the shareholders had they collected their votes and voted.

Source: Berk and Demarzo, Corporate Finance, part on valuation (can't recall edition, was a while ago since I took the course)

All true, hypothetically and in theory. What's most important fir this discussion is that "[t]here doesn't have to be an actual cash distribution to value a company." That's the whole point, especially with growth stocks during growth years. If shareholders want to participate in the success of the enterprise, they do so through appreciation of their shares, not by expecting a dividend or a corporate liquidation.

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Out of curiosity: what happens in your world if 100% of share holders opt to liquidate AAPL?

What a silly question. The answer is the same thing that happens in everyone's world when a majority (any minority shareholders rights aside) forces corporate action. Shareholders acting in concert have power. Shareholders together do own the corporation. However, a 1% owner has zero rights acting alone to access/demand assets/cash of the entity.

 

[divinox]

Again, you isolate things out of context for purposes of your silly argument. My entire statement was:
"The price of a growth stock most certainly is not determined by anticipated future cash flow to the stockholder. That should be clear since there is zero likelihood of any cash flow to the shareholder for the forseeable future. (that also would be circular reasoning since the only forseeable cash to the shareholder would be the through sale at the future price). The price is determined by expected earnings of the entity. An expectation of the return of invested capital certainly is true in any investment. However, with publicly traded stocks, the expectation of return of investment plus any profit is through what I believe you previously called an "intermediary step"--sale of your stock."
I seriously hope no one here believes what you've continued to post since your biz 101 theory is far removed from how it works and how stocks are valued in the real world.

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All true, hypothetically and in theory. What's most important fir this discussion is that "[t]here doesn't have to be an actual cash distribution to value a company." That's the whole point, especially with growth stocks during growth years. If shareholders want to participate in the success of the enterprise, they do so through appreciation of their shares, not by expecting a dividend or a corporate liquidation.

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What a silly question. The answer is the same thing that happens in everyone's world when a majority (any minority shareholders rights aside) forces corporate action. Shareholders acting in concert have power. Shareholders together do own the corporation. However, a 1% owner has zero rights acting alone to access/demand assets/cash of the entity.

Its not silly at all, given that you read my earlier post thoroughly; the board rules by authorization by the share holders. The share holders own the company, not the corporate entity. Ergo: dividends are in no way handouts.

 

[mccldwll]

Its not silly at all, given that you read my earlier post thoroughly; the board rules by authorization by the share holders. The share holders own the company, not the corporate entity. Ergo: dividends are in no way handouts.

Of course they're not handouts. However, the shareholders hold fractional shares in the entity, and the entity holds the assets. Your hypothetical 1% shareholder has no right to demand distribution of 1% of cash/assets. he's only entitled to that 1% on a distribution (such as cash dividend, stock dividend, spin off, or upon liquidation). Until such an event, he only has a piece of paper (minority rights aside) which is only worth as much as someone else is willing to pay.

 

[TallManNY]

Conclusion: you either hold a higher percentage of a lower valued company, or a lower percentage of a higher value company. Dividends are irrelevant if one does not look at taxes or frictions. I really suggest reading Modigliani Miller fur further clarification. I am sure there are better explanations than the one I have provided.

In your fact pattern, dividends are irrelevant, but the decision to hold stock is also a bet on future results. In the case of Apple, I believe there are significant future revenue to be earned by the company. So I significantly prefer to own a higher percentage of a today lower valued company (i.e., the after dividend has been paid) than a lower percentage of a higher value company (i.e., where I create my own dividend by selling a little bit of my stock).

For the last few years some Apple shareholders have been saying, "Pay us a dividend Apple, you don't need to horde more cash." Apple has continued to build a stockpile of larger and larger amounts of cash. Apple has not put that money to use. So as of now, the folks who two years ago predicted that (a) Apple would have tremendous positive cash flow and (b) it would have large cash surpluses that are not being productively utilized, those people were right. I, incidentally, was one of them. I'm going to predict now that Apple will have huge positive cash flow in 2012. I'm going to predict now that Apple will not spend the $10's of billions of dollars it has in surplus. We can see at the end of 2012 if I'm right.

Of course Apple's board and management can always take the position that it is a good thing to have $80 billion plus sitting in the bank in case some great acquisition becomes possible. And Apple's board and management is much more capable of making that determination than I. But I can still have an opinion, and from where I sit I can't see a good use for the money (especially in light of what I think is going to be an absolutely ridiculous year in terms of profitability).

Side note, it is totally accurate though to keep in mind (as mentioned above) that the offshore money (which is a majority of it) is probably going to sit there until the U.S. passes a tax amnesty. It is sad, but since that idea gets a lot of credence and has been put in place in the past, all companies will now structure around the anticipation of eventually getting that tax break.

 

[GfPQqmcRKUvP]

Again, you isolate things out of context for purposes of your silly argument.

Out of context? I quoted one sentence and that sentence is flat-out wrong no matter what is before or in front. Well, I'll tackle the rest of your statement as if that changes anything.

An expectation of the return of invested capital certainly is true in any investment. However, with publicly traded stocks, the expectation of return of investment plus any profit is through what I believe you previously called an "intermediary step"--sale of your stock."

Do you know the reason why someone else is willing to take the shares off your hands for a certain price? How is that price determined? What do you think would happen to the stock of Apple said "We will keep on operating indefinitely and will never pay a dividend or sell our business" and the market believed them? Please, I'd like your answer.

I seriously hope no one here believes what you've continued to post since your biz 101 theory is far removed from how it works and how stocks are valued in the real world.

Valuations can only be accomplished by assuming future payout via dividends, liquidation, or sale. Call it "biz 101" all you want, it's correct.

 

[mccldwll]

Out of context? I quoted one sentence and that sentence is flat-out wrong. Well, I'll tackle the rest of your statement as if that changes anything.



Do you know the reason why someone else is willing to take the shares off your hands for a certain price? How is that price determined? What do you think would happen to the stock of Apple said "We will keep on operating indefinitely and will never pay a dividend or sell our business" and the market believed them? Please, I'd like your answer.



Valuations can only be accomplished by assuming future payout via dividends, liquidation, or sale. Call it "biz 101" all you want, it's correct.

Are you just out of school or something? You really don't know what you're talking about in the real world of investing. Try running that statement--that future valuation can ONLY be determined by assuming future payouts (as opposed to the ABILITY to make future payouts, which is the assumed/expected future earnings potential of the corporation) -- by any investment professional. Try it.

 

[GfPQqmcRKUvP]

Try running that statement--that future valuation can ONLY be determined by assuming future payouts (as opposed to the ABILITY to make future payouts, which is the assumed/expected future earnings potential of the corporation) -- by any investment professional. Try it.

I did, and I didn't agree. Neither did the guys on my desk.

Look, valuation relies on payouts at some point in the future. Tell me what would happen if Apple said they are never going to sell the company or pay dividends and the market believed them. Also assume they're still making their billions. What would happen to the price of the stock?

 

[mccldwll]

I did, and I didn't agree. Neither did the guys on my desk.

Look, valuation relies on payouts at some point in the future. Tell me what would happen if Apple said they are never going to sell the company or pay dividends and the market believed them. Also assume they're still making their billions. What would happen to the price of the stock?

I'm not going to rub it in but the fact that investment professionals don't agree with you and your buds Is what I was initially talking about when I referred to it as a biz 101 perspective. As to your hypothetical, the real answer is actually fairly complicated and involves a big game of chicken, hedge funds, private equity funds, and cnbc. However, the short answer, assuming that such retention bothers the majority of the shareholders (remember, BRK.A has basically said the same) is that the board would be voted out. That really isn't the case with aapl. Aapl has much larger cash needs, and far less cash available for distribution, than generally has been discussed in this thread. However, I still expect a modest dividend to be reinitiated within the next 12 months. If aapl doesn't I don't have a problem with that. I view it as an opportunity to get into cutting edge investments at bargain prices at
pre-tax prices (compared to a dividend less tax).

 

[divinox]

Of course they're not handouts. However, the shareholders hold fractional shares in the entity, and the entity holds the assets. Your hypothetical 1% shareholder has no right to demand distribution of 1% of cash/assets. he's only entitled to that 1% on a distribution (such as cash dividend, stock dividend, spin off, or upon liquidation). Until such an event, he only has a piece of paper (minority rights aside) which is only worth as much as someone else is willing to pay.

He has the right to demand it, but he certainly doesn't have the authority to get his will through though. Either way, how is that relevant? I never claimed he did.

 

[TallManNY]

However, the short answer, assuming that such retention bothers the majority of the shareholders (remember, BRK.A has basically said the same) is that the board would be voted out. That really isn't the case with aapl. Aapl has much larger cash needs, and far less cash available for distribution, than generally has been discussed in this thread. However, I still expect a modest dividend to be reinitiated within the next 12 months. If aapl doesn't I don't have a problem with that. I view it as an opportunity to get into cutting edge investments at bargain prices at
pre-tax prices (compared to a dividend less tax).

Mccldwll,

It has been interesting to watch the back and forth here. I don't think I've ever disagreed with someone quite as much as you while at the same time having that person write as clearly and as knowledgeably. Anyway, I'm on the side of the group that thinks that eventually a company must return cash to shareholders or else there is no point in owning the stock. But the general paucity of dividends paid by companies is a counter argument. Maybe our investments in stock are irrational or only rational because we believe that someone else will make the irrational investment and buy it from us. RIM is a nice example of a company that was wildly successful for years but was never able to return cash to shareholders directly (well at least not through a dividend and the possibility of a buyout at the current prices probably isn't to exciting to long time owners). The only way to play the RIM game successfully was to get out before the music stopped playing.

Anyway, do you think Apple really has significant cash needs as compared to what is by all accounts a tidal-wave of cash coming in this quarter? Of course Apple spends a lot, but they spent a lot last year (remember those multi-billion dollar ties ups of product) and they still made huge profits. Do you think their budget has increased so much that they might be cash flow negative anytime soon? (By that I mean in the next year, who can predict much beyond that?)

[Edit: Ahh, I see you earlier talked about some of this in an earlier post. Main point is that much of the cash is offshore (as are lots of the future earnings and probably this will continue to become a greater and greater percentage of earnings) and Apple will probably keep it there until Congress passes a tax amnesty or otherwise allows avoidance of the taxes that are normally due when returning foreign earnings.]