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.