Apple (AAPL) Throws Away Cash Hoard On Dividend; Smart Grid Would Be Smarter

Oh, for crying out loud.  Steve Jobs’ ghost has barely begun to haunt Cupertino and his company has begun to risk everything he rebuilt in the last years of his life. Apple (AAPL) has elected to start paying out its massive cash hoard as a dividend.  I hinted at my own preference yesterday but now I can be more forthright.  Paying such a large dividend now sets unrealistic expectations for later dividend increases at a time when consumer spending on tech worldwide (specifically in North America and Europe) is very vulnerable to another recession.

I could understand starting out with a token amount, say $0.01/share just to establish a dividend policy and leave room for future growth.  The danger in announcing such a large-scale payout is that, in any future downturn, Apple will be forced to consider cutting its hefty dividend to conserve cash.  Wall Street almost always interprets dividend cuts negatively.

Tech companies are not “widows and orphans” types of stocks because their monopolies are by definition based on technologies subject to rapid change.  Most true monopolies (like utilities and some Class I railroads) are geographic monopolies and are thus able to extract true monopolistic rents because their customers can’t just pick up and move if they don’t like rate increases.  Technology companies can’t extract the same kinds of rents because there’s always the threat of other upstart technologies just around every corner.  Monopolistic rents contribute to stable dividends more than anything else in a business model.  Just ask Warren Buffett.

Apple could have used its massive cash pile to embark on a truly monopolistic development.  It could have leveraged both its brand reputation for user friendliness and its knack for building robust platforms into a user interface for in-home smart-grid technology.  One growing roadblock to smart-grid adoption is the concern that Big Brother, whoever he is, could sweep up data on household electricity use into something nefarious.  The retail consumer’s interaction with this “last inch” interface will determine its ultimate penetration.  An Apple interface on in-home smart grid meters could do wonders for enabling local energy conservation and for alleviating common fears about scary new technology.  It could also tie Apple permanently to to the monopolistic models of energy utilities, securing its dividend forever.

It’s unfortunate that Apple is counting on many years of growth from a mobile computing market that is rapidly maturing.  It is about to bet its dividend policy on a curious business model.  Users trade in old iPads for new ones one-for-one; net income growth thus comes solely from higher prices in a fixed market while competitors introduce progressively lower-priced substitutes.  This is a recipe for a dividend policy that will eventually collide head-on with a mature market where easy substitutes are available from low-cost producers.  GM and Chrysler learned that lesson to their detriment.  My suggestion for “Apple smart meters” above is the kind of out-of-the-box thinking Steve Jobs would have eventually used if he had lived longer.  Maybe I’m channeling his spirit.  Call it the iGrid or iMeter and it’s a winner!

Full disclosure:  No position in AAPL at this time.

About Anthony Alfidi 128 Articles

Affiliation: Alfidi Capital LLC

Anthony Alfidi is the Founder and CEO of Alfidi Capital. His firm publishes free investment research with honesty and humor.

Mr. Alfidi holds a Bachelor's degree in human resource management from the University of Notre Dame (cum laude) and an MBA in finance from the University of San Francisco. He is a life member of Beta Gamma Sigma, the academic honor society for business majors. He has been a private investor since the 1990s.

Visit: Alfidi Capital

17 Comments on Apple (AAPL) Throws Away Cash Hoard On Dividend; Smart Grid Would Be Smarter

  1. I sort of agree with you – issuing dividends is like deciding to dance with a gorilla: You can’t sit down until the gorilla wants to stop…which is usually longer than you want to dance.

    Where I think you miss the point is that AAPL is really maturing both as a media creation-enabler (iBooks, iMovie), a high-end media marketer ($20 for TinTin on iTunes today, $5 to rent Dragon-Tattoo) – and who knows what iTV will bring? Amazon had no choice but to try to recapture the media-marketing flag with its own hardware, but is unlikely to benefit from anything but its Kindle app on iTunes.

    Samsung keeps on making better and better hardware – the net benefit is they are enhancing components like the retina display that Apple buys and continues its tablet-market lock. Lenin once said that when it came time to hang the capitalists, they would (innocently) sell him the rope.

    Conversely, when everyone owns something, no one invests real money in making it better – ergo, Android. Like a Ukrainian minister told me when I was shocked at the stench from a rest room in Kiev’s best hotel in the weeks after the collapse of communism: “Where everyone is an equal, no one wants to clean the toilet.”

    I figure there were about 5 years worth of dream machines on Steve’s desk when he died. In the meantime, Apple University will attract the next generation of Jobs-to-be candidates.

    I remember once visiting orthopedics company Zimmer about 20 years ago, and saw a guy in an office who never went to meetings, but just kept working on his own. I asked an executive who he was, and was told, “He’s had two ideas in the past five years that each made us $100 million. We want to give him all the space he wants to come up with a third (idea).”

    I believe Apple probably has a hundred such guys who have embraced the dream and – like you – have channeled Steve Jobs.

  2. You’re complaining about Apple’s choice and then suggesting that Apple should build smart home grid technology? Good grief.

    You say that Apple is susceptible to another recession but left out the fact that thus far, Apple hasn’t been affected by any rescission over the past years. While other tech companies are struggling to make money, Apple keeps chugging along with no issues.

    I thank my lucky stars that all the arm chair analysts aren’t running Apple, we’d be in big trouble then.

  3. Obviously an Apple Hater. They are making like $40 Billion a year in profits. The dividend is a spit in the bucket. Get out of the way as the Apple Train runs you over loser.

  4. “net income growth thus comes solely from higher prices in a fixed market”, really? Go back to your MBA class dude. Ever tracked the device sales?

  5. “Users trade in old iPads for new ones one-for-one; net income growth thus comes solely from higher prices in a fixed market while competitors introduce progressively lower-priced substitutes. This is a recipe for a dividend policy that will eventually collide head-on with a mature market where easy substitutes are available from low-cost producers.”

    I think your blanket assessment of users trading in old iPads for new ones on a one-for-one basis is off, but not as far off as the “fixed market [with competitors introducing] progressively lower-priced substitutes. I know many people who just bought their first iPad (even if they purchased a second-hand iPad, they will likely buy new the next time; or by buying used, they are supporting someone’s habit of buying new).

    What competitors are introducing progressively lower-priced substitutes? What device actually competes with the iPad on every level? (Not just technical specs or a handful of features; but a widely-adopted, now almost common-place that has an incredibly easy and satisfying user experience?) One day the market might be saturated, but I think there’s a lot more ground to cover before the fat lady sings.

    I don’t think the dividend was a good idea either, as they could’ve definitely done something more exciting and arguably Earth-shattering with $100bn to chase future growth…

  6. Apple is not throwing away its cash. Do the math. As a percentage of revenue, the dividend is one of the smallest in the tech and business sector. As most sane analysts have pointed out, Apple will still continue to pile up cash, as its projected earnings easily outpace the dividend being paid.

  7. You’re kidding, right? You do realize that the net payout on both dividends and buyback over the next 3 years is less than the total amount Apple has added to the cash pile in the past year alone? What about emerging markets? There’s plenty of room for growth.

  8. You’re missing a central problem with household smart grid adoption: those who rent are not going to be customers, and few homeowners are going to want to spend thousands of dollars to retrofit something that would need to be custom-designed for every seat and offer little value beyond coolness.

  9. Re: failing of iPad trade-ins
    Its not a negative to accept trade-ups because they are using them as a repair/replace stock, much cheaper than a new replacement! (The sealed construction of the iPad requires replacement)

    Also, Apple nets more profit on a trade-up than amazon or samsung makes selling one of their tablet computers new! Its Apple’s way of rewarding brand loyalty while still making a profit (genius!).

  10. A couple of quick points

    1) Calling a 1.8% dividend large is a bit much. That is a payout of 2.47 billion a quarter. They have been net $6-$13billion each of the last 4 quarters.
    2) Apple owns a small percentage of the mobile phone market much room to grow.
    3) The tablet market is in it’s infancy
    4) Upcoming Apple integrated Television is another revenue leg that could be very lucrative
    5) The thought of a $.01 dividend is insulting would have been a waste of time and would have cause many to question the sanity of management.

  11. Apple’s dividend is less than 25% of profits, throw in future profits and I’m sure it will be even less, plenty of room for R&D and increase dividends if desired by the board. Getting into some kind of technology (smart grid meters) so far removed from their business model would be unlikely and one I’m sure they would not do. Apple doesn’t want to be the Walmart of all things digital.

  12. Smart companies that innovate, know their place (what they are good and not good at), and ultimately become highly successful generally bring out all of those that have opinions of how they could have done better. If your channelling Steve Jobs than nodoubtedly you’ll know that he is as proud of the decisions they have made to NOT do certain things as they are proud of the decisions they’ve made to do certain other thIngs. I think the company is I good hands. Steve asked that they NOT ask themselves…”What would Steve do?”

  13. Kind of a silly piece, IMO. As others have pointed out, the dividend will reduce the cash pile more slowly than it has been building through income. They have an unprecedented pile of cash and it will continue to grow, even while paying out the dividend.

  14. This was one of the most bizarre articles I’ve ever read in my life. A $0.01 dividend???? Really? The analysis here is so amateurish I don’t even know where to begin.

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