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The dividend issue is a kind of prickly one for me. I feel in general that a company should offer a dividend if they have enough profit left over after investing in the company by funding things like R&D, having cash on hand, etc. Apple has done all of those things and still had incredible profits, so I just don't quite get the logic behind not offering a dividend.

I mean, heck... let's start solely based on the interest earned off of the cash on hand Apple's accumulating. Apple has $81 billion in cash as of last quarter. Assume a 2% interest rate. With 929 million shares, Apple could offer an annual dividend of $1.74 per share just on the interest alone.

And that is just a starting point. Apple made $6.6 billion in profit last quarter. Say they kept 4.4 billion (so a majority) and re-invested it, and gave 2 billion back to shareholders. Now, let's also say, for simplicity, that last quarter is an average Apple quarter and multiply this by 4 to span a year (it's not... it's actually very low for Apple). $8 billion / .929 billion shares = another $8.6 in dividends Apple could offer.

That's $10.34 in annual dividends per share that Apple can offer its shareholders, and it still has a ton of cash left over to re-invest.

($10.34 may not seem like much compared to a $400 share price, but when you have DRIP in a retirement account, it adds up)
 
Paying dividend reduces the capital value of the company.

Shares are now so divorced from the idea of owning part of the company now that it does not really make much sense to pay dividend to the "current" owner of the shares as they are bought and sold on a daily basis. They have become commodities in of themselves.

The only companies that pay dividends are those with a dropping or stagnant share price. MSFT is one such company.

I tend to look at this another way, based on Warren Buffett's view of dividends.

Assume that Company A and Company B are both good at generating operating cash flow from quarter to quarter.

However, Company A has a transient management and doesn't necessarily do better than the S&P in terms of growing the book value of the business.

Company B has fairly solid management and consistently outperforms the S&P in terms of the real growth of the business in terms of book and/or enterprise value.

In Company A's case, I want the dividends, because I can turn around and generate a better return from the cash from those dividends than the company is generating for the value of my shares... and ultimately the market price. It may seem like value and price are divorced from one another, but institutional buyers use the same methods I do to triangulate the actual carrying value of the company, and so they tend to set a baseline of fair market value that influences the overall market capitalization because no M&A guy in his right mind is going to recommend paying more than their estimate of intrinsic value to buy such a company outright.

In Company B's case, I want them to manage that money for me because they're long term thinkers who know how and where to invest that money in the growth of their business which in turn influences the company's ability to generate continued operating cash flow. And this IS important to the prospect of getting a return at a later date in terms of market price growth because few people are going to keep bidding up a total dog of a company that doesn't keep generating operating cash. Think of the working capital (inventory) and book value (assets minus liabilities and intangibles) as the cash generating engine, and operating cash flows as the cash generated by that engine (as opposed to financing or investing activities).

But all this also requires coming to a realistic triangulation of the intrinsic value of the company. Given all the above factors, and that I know Tim Cook has incentives to stay for ten years, taking into account the expected shrinkage of the growth rate of Apple's operating cash flows, and that Apple has about four more years of Jobs'-influenced products in the pipeline, after which they'll reach some kind of terminal growth rate in the single digits, a moderate estimate puts them at about $386 per share... or less than their current trading price.

For this reason, I'm not buying Apple stock at this time... even more liberal estimates, which put intrinsic value around $450 per share, don't give me the margin of safety I look for in long term investments. I'd much rather find something grossly underpriced by the market relative to its actual strength as a business.

With Apple already one of the two most expensive companies in terms of market capitalization, they've got a lot more downside than upside.... and I don't count on the market to tell me what price I *should* pay for a piece of a company.
 
I am unclear why Apple needs 24,000+ employees in "corporate". Maybe the Tech Support Dept has like 10,000? 24k is a lot for a company that creates/sells 3-4 product lines with a total of about 15 unique products at any given moment. And aren't all these 24k in 1 office park?

My guess is that a lot of the 24k are Tech Support. But still, even 14k is a lot.
 
($10.34 may not seem like much compared to a $400 share price, but when you have DRIP in a retirement account, it adds up)

It adds up IF the stock price continues to rise over time. But if the stock price is flat or declines you can take a loss on shares bought w/ DRIP. I give you Exxon, Apple's high market cap competitor. It pays a very good dividend but it's share price has been bouncing around $75 to 85 for a few years.

Most stocks that pay worthwhile dividends do so b/c they are not high growth and have to give shareholders a reason to hold the stock. I keep Apple because it keeps growing even in bad economic times. And with $80B in the bank it makes a great cushion to protect shares from free falling to a few bucks like former tech high fliers like Cisco, Lucent, JDS Uniphase, etc.
 
I tend to look at this another way, based on Warren Buffett's view of dividends.

Assume that Company A and Company B are both good at generating operating cash flow from quarter to quarter.

However, Company A has a transient management and doesn't necessarily do better than the S&P in terms of growing the book value of the business.

Company B has fairly solid management and consistently outperforms the S&P in terms of the real growth of the business in terms of book and/or enterprise value.

In Company A's case, I want the dividends, because I can turn around and generate a better return from the cash from those dividends than the company is generating for the value of my shares... and ultimately the market price. It may seem like value and price are divorced from one another, but institutional buyers use the same methods I do to triangulate the actual carrying value of the company, and so they tend to set a baseline of fair market value that influences the overall market capitalization because no M&A guy in his right mind is going to recommend paying more than their estimate of intrinsic value to buy such a company outright.

In Company B's case, I want them to manage that money for me because they're long term thinkers who know how and where to invest that money in the growth of their business which in turn influences the company's ability to generate continued operating cash flow. And this IS important to the prospect of getting a return at a later date in terms of market price growth because few people are going to keep bidding up a total dog of a company that doesn't keep generating operating cash. Think of the working capital (inventory) and book value (assets minus liabilities and intangibles) as the cash generating engine, and operating cash flows as the cash generated by that engine (as opposed to financing or investing activities).

But all this also requires coming to a realistic triangulation of the intrinsic value of the company. Given all the above factors, and that I know Tim Cook has incentives to stay for ten years, taking into account the expected shrinkage of the growth rate of Apple's operating cash flows, and that Apple has about four more years of Jobs'-influenced products in the pipeline, after which they'll reach some kind of terminal growth rate in the single digits, a moderate estimate puts them at about $386 per share... or less than their current trading price.

For this reason, I'm not buying Apple stock at this time... even more liberal estimates, which put intrinsic value around $450 per share, don't give me the margin of safety I look for in long term investments. I'd much rather find something grossly underpriced by the market relative to its actual strength as a business.

With Apple already one of the two most expensive companies in terms of market capitalization, they've got a lot more downside than upside.... and I don't count on the market to tell me what price I *should* pay for a piece of a company.

Very good explanation. The basic idea that Apple could either give me a couple of bucks every so often, and I can turn around invest that wherever I see the best return, or they can keep it and make my existing investment grow a little bit more.

There's one caveat though -- Apple already has a lot of trouble putting all of that cash on hand to work. I'm sure they wish there was some other company performing as well as they are, so they could buy it up and watch a $40B investment grow instead of $40B in the bank not grow (or grow at the rate of a safe harbor investment of some sort). A buyback might make sense as an investment, but the share price is already quite high compared to all of their competitors except for google.

Regarding the valuation of $386/share, there's something more to Apple beyond it's p/e ratio and the other factors that contribute to a 'by the numbers' valuation. That is to say, its market value has exceeded its intrinsic value for a long time, and consistently so.

Regardless of whether you personally happen to be an Apple fan or not, it's undeniable that there's a lot of emotion (positive) and loyalty associated with the brand and the products themselves. It's probably because of this reason that the stock has consistently stayed well above its book value, despite people making the same argument as the stock hit 200, 300, 400, etc...
 
It adds up IF the stock price continues to rise over time. But if the stock price is flat or declines you can take a loss on shares bought w/ DRIP. I give you Exxon, Apple's high market cap competitor. It pays a very good dividend but it's share price has been bouncing around $75 to 85 for a few years.

Not necessarily. DRIP gives you more shares of the stock. The more shares you have, the more dividends you get. DRIP at its worst is compounded interest. At its best, it's making automatic investments for you.
 
Not necessarily. DRIP gives you more shares of the stock. The more shares you have, the more dividends you get. DRIP at its worst is compounded interest. At its best, it's making automatic investments for you.

You don't invest in stocks that have explosive growth for the hope of a dividend. Stick to mature stocks like Microsoft that are flat and will never explode. Or get smart and have a diverse portfolio of stable stocks with a few Apple like leaders early and ride the wave.

My position has been growing and started of course after merging from NeXT but a lot of my friends dumped all their shares early on for a Ferrari or other some such stuff.
 
Come on Apple, do something cool with all that capital. OS XI with content-awareness and an AI assistant an stuff. Build cylons. Just... do something...

I'm good with the cylon building thing. Not that 1978 crap. I'm talking the number 6 stuff from BSG. She can sit on my face anytime. Boomer too. The new boomer, not the old 1978 Boomer... Well, maybe if he wined and dined me first. Then maybe... just maybe... and tell me I'm a pretty girl while stroking my hair...

I think I have said too much.
 
This is nothing new. People have been calling for Apple to pay dividends for quite some time now. However, few things scream ignorance of Apple as a company, and the chemistry of what makes them successful as a company, quite like the expectation that they should be paying dividends.

Wall Street is the ruination of a company. Manage for stock value, you get screwed. Eventually, you change from a venture-capital startup to a bunch of fussbudgets clipping their coupons, thinking you can just force the company to comply with whatever you want. I'd say they need to buy some databases for Siri. They need to keep their lawsuits going.

Any questions?
 
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I'm tired of CNN and other financial news outlets pressuring AAPL to provide divs. Sell if you want divs.
 
$81.5 billion in cash and cash equivalents
$108 billion net sales, almost $26 billion net income.

...wow.
 
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Very good explanation. The basic idea that Apple could either give me a couple of bucks every so often, and I can turn around invest that wherever I see the best return, or they can keep it and make my existing investment grow a little bit more.

There's one caveat though -- Apple already has a lot of trouble putting all of that cash on hand to work. I'm sure they wish there was some other company performing as well as they are, so they could buy it up and watch a $40B investment grow instead of $40B in the bank not grow (or grow at the rate of a safe harbor investment of some sort). A buyback might make sense as an investment, but the share price is already quite high compared to all of their competitors except for google.

You're overlooking a few things here.... having a tremendous amount of cash is good insulation. Not only does it help buffer them against all types of potential litigation that might otherwise put a dent in operating cash rather than retained earnings, but it also gives them plenty of wiggle room for advertising, R&D, and strategic acquisitions when they arise. Companies that are fairly short on cash suffer much more volatile swings on their P&L statements and end up incurring interest expenditures that can balloon to a point where they can't dig themselves out of debt. They can also use some of that cash (and they do) to acquire tremendous volume discounts on materials and third party components, and even lock up a particular supplier for months to come.

And finally, there's the boost to the book value of Apple... which in and of itself is huge insurance against any kind of hostile takeovers or leveraged buyouts. The fact that they have all these insulations against incurring interest expenditures makes their net cash flows that much larger.

And the truth is they are spending operating cash... a quick look at their cash flow statements reveals that they've spent much of last year's operating cash as quickly as they got it, mostly on strategic acquisitions. Could they make more acquisitions? Sure but there are only a handful that will mesh well with their strategic long term goals and Apple's DNA... the more they foray into weird acquisitions that don't make sense, you have to remember that once they make the acquisition they then have to manage that business... and that can pose risks that simply aren't worth it.

Another thing is that by tying it up in overseas investments, there's a tremendous amount of tax they've deferred that would otherwise be incurred... It might be why they've made some strategic acquisitions now because if the choice is between reinvesting versus cashing that out, cashing out costs them more than what they're likely to gain from strategic acquisition or simply keeping the cash and equivalents earning them a pretty sizable return (in dollar volume)... and a relatively risk free one at that (though there is some currency risk here and there, but that evens out if they're not planning on blowing $80 billion in the immediate future.

Regarding the valuation of $386/share, there's something more to Apple beyond it's p/e ratio and the other factors that contribute to a 'by the numbers' valuation. That is to say, its market value has exceeded its intrinsic value for a long time, and consistently so.

Aside from the fact that I never use P/E ratios (totally meaningless but they are easy calculations that make the average analyst/broker sound more intelligent than they are) in my valuation (I'm almost strictly triangulating between DCF-based terminal and intrinsic valuations that take me maybe 15 minutes tops), Warren Buffett used to say "Price is what you pay. Value is what you get."

To arrive at a sensible price as to what you *should* pay for an asset is something you have to figure out independent of what every other yahoo is willing to pay. The market, quite simply, has a lot of speculators... and that doesn't mean one should be as quick as them to run out and make a foolish move. I'm not saying Apple doesn't have any upward room but... that might be one or two puffs of the cigarette. That's not an investment. That's speculation... I treat every transaction as though I were acquiring the business whole, because institutional buyers who have the power to drive market price and directionality are playing the same game. They're waiting for speculating shucks to overpay for that asset... and there's enough of them to create a lot of liquidity at levels above intrinsic value, but how does that assure me a profit? Simply put, I'm assured a much larger profit if I look for underpriced companies for which the market hasn't yet gotten wise to their true value, but may at a later date... If they meet all my criteria, then I determine just how much risk exposure is sensible given how much of a margin of safety there is (the amount below intrinsic value at which the security is currently priced) ... to insulate myself against any kind of catastrophic loss.

This is the same philosophy that made billionaires out of Warren Buffett, Walter Schloss, Jean-Marie Eviellard and many other value investors... and they're happy to sell to suckers who think that the market is actually right all of the time. My basic philosophy is to not be on the losing side of that equation.

Regardless of whether you personally happen to be an Apple fan or not, it's undeniable that there's a lot of emotion (positive) and loyalty associated with the brand and the products themselves. It's probably because of this reason that the stock has consistently stayed well above its book value, despite people making the same argument as the stock hit 200, 300, 400, etc...

I'm a fan of Apple... but I'm also a pragmatist and a business valuation expert. I understand what you're saying but as I stated above, I'd rather buy when it's undervalued and then sell to the fool willing to pay more than its worth and turn a much bigger profit than if I had taken a puff or two off an already overpriced stock. There are many, many other opportunities out there every day... and I've already seen what happens when people confuse speculation for investment. I made a fair amount of money off Apple and I exited at a price I feel pretty comfortable was the right place to exit.

The reason Apple went to 200, 300, 400.... remember that as the business grows so too does book value, but if you've been keeping an eye on their performance the lead is actually narrowing. Apple was trading in the past two years at as much as nine times their book value. They're now closer to 5 times book value... and slightly above their intrinsic value (book value + enterprise value or NPV of DCF looking ten years forward). This makes sense to me because their operating cash flows are starting to flatten. When you take that into account and the fact that every year of double digit growth reduces the size of the market that they've not already sold products to, and the pipeline of products approved with Jobs' personal involvement, you've got probably four years before growth decelerates to a terminal value.

Could that be wrong? Sure, but investment means erring on the side of risk aversion rather than blind risk taking... because if you constantly chase after huge returns (which carry the risk of huge losses on the other side), and you gamble big on them, you'll keep wiping out your principal balance, which is a lost opportunity to enjoy the fruits of compounding interest over time. Any number times zero is still zero.

Excellent reading material in this regard is The Intelligent Investor by Benjamin Graham, Buffett's mentor. In fact, it's worth noting, because the entire practice of reinvesting rather than paying dividends was probably influenced by the triangle between Jobs, Gates and Gates' philanthropic partner, Warren Buffett. Berkshire-Hathaway has not paid a dividend since 1964, and they have grown their book value consistently at around 20% annually compounded per year for forty years, without splitting their Class A Common shares, which are currently trading at around $117,000 per share... or about 1.15 times book value. The pricing keeps the stock away from speculative volatility and much closer to a respectable fair market value... which is much more attractive for serious long term investors who don't treat the stock market as their personal casino.
 
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I am unclear why Apple needs 24,000+ employees in "corporate". Maybe the Tech Support Dept has like 10,000? 24k is a lot for a company that creates/sells 3-4 product lines with a total of about 15 unique products at any given moment. And aren't all these 24k in 1 office park?

My guess is that a lot of the 24k are Tech Support. But still, even 14k is a lot.

That's a pretty small amount of employees for a global company. You have to remember that not all the 24,000 employees are at One Infinite Loop. I've worked for global Fortune 500 companies ranging from 35,000 to 150,000 employees. My present employer is the smallest I've ever worked for, with 7500 employees, about 500 of which are in my business unit alone.
 
- Apple went from 317 stores at the end of fiscal 2010 to 357 stores at the end of fiscal 2011, an addition of 40 stores. The average number of employees per store also grew from 83.6 to 100.8.

How can there be 100 employees per store?

If Apple had 10 different staff working every day, and every person only worked 1 day per week, that's still only 70 people per store...
 
How can there be 100 employees per store?

If Apple had 10 different staff working every day, and every person only worked 1 day per week, that's still only 70 people per store...

Each Apple store easily has more than 10 employees on the floor at the same time. Even the smallest ones do. Also not all employees are on the floor such as store managers etc.
 
Reading some of these comments about apple paying dividends makes me laugh.
Dividends..really???? You can't be serious, apple is the definition of a growth company. People have mentioned Buffet's view on dividends, it's irrelevant. Buffet is a value investor, not growth.

Not ONE real investor (meaning institutional) expects apple to pay any kind of dividend. And I can guarantee they don't want them to. Just look at the charts.

For reference, look when msft (which was considering a growth company) announced they were going to pay dividends. Not good.
 
I am unclear why Apple needs 24,000+ employees in "corporate". Maybe the Tech Support Dept has like 10,000? 24k is a lot for a company that creates/sells 3-4 product lines with a total of about 15 unique products at any given moment. And aren't all these 24k in 1 office park?

My guess is that a lot of the 24k are Tech Support. But still, even 14k is a lot.


contrary to belief here SJ doesn't code everything himself. takes a lot of people to write software, design and test all the products. a developer can write about 100 good lines of software per day
 
Even more cash? How much cash must a company have? 100 billion? The second statement is just not true.

Actually the second statement about cash is true. The third statement is totally speculative.

A payout of dividends means a reduction of cash that would otherwise go into Retained Earnings. There's a number of things I'd stated in my previous post that Apple's $76.2 in equity insure against.

But NOTE, only $9.8 billion is actually "in cash" on hand, the rest are receivables, short term and long term investments--the latter of which totals $55 billion. So, until they hit yield to maturity on those long term investments, they cannot simply "cash out" of and go acquire whatever they like without incurring some kind of penalties against the guaranteed yield.

But this gives them unprecedented bargaining power with suppliers and potential investments. Berkshire-Hathaway is able to secure warrants for preferred shares from the likes of Bank of America and Goldman Sachs that pay huge dividends. These companies, because they need Berkshire's infusions of cash, have to pay a premium to buy back the shares... So, if they buy them back, Berkshire wins. If they don't, Berkshire still wins, by collecting gigantic dividends. Whether those companies do well or poorly, Berkshire makes money. I suspect Apple has a few investments like that, and other hedge funds that few companies have access to with their limited amounts of capital. And this in turn helps generate a constant stream of financial cash flows which they turn around and put into R&D or other strategic investments, AND keep growing rather than shrinking their total book value.

The cost of liquidating all their long term investments to make a large acquisition could be huge, especially if the acquisition isn't well thought out and turns out to be a dud. I'm sure Apple has some of the best fund managers at their disposal to weigh the risks versus benefits. As an investor, one should be happy that Apple's sitting on a giant pile of cash that ensures their long term health and insulates the Enterprise Value of the company from catastrophic loss or even fluctuations in the markets for their products as well as the credit markets... which would cause other companies to take substantial hits in cost of capital, thereby affecting the rate at which their future cash flows are discounted to present value to arrive at a fair market value for the stock price... noting that 70% of Apple's shares are institutionally-owned, meaning that the majority of influence over the stock price is coming from organizations that understand what Apple's real market value ought to be.
 
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