Should we pay a dividend? What rate will please the shareholders? Will this dividend attract new investors? What does this dividend level say about our performance? What does it say about our future prospects? There are so many factors for managers to consider when making decisions about the payment of dividends. As a result dividends are a tough balancing act for corporate managers.
Apple serves as a curious case when looking at dividend policy. The company has not paid a dividend since 1995 instead preferring to plough money back into the business. Any surplus cash in this period has been used to help grow the business through research and development, acquisitions, new retail store openings and improvement of infrastructure. This has proved very successful and Apple is now the world’s most valuable company being worth more than $500bn. Yet despite all this success the company has not paid a dividend for close to twenty years.
However this changed recently when Apple announced on the 19th March that it would pay a dividend of $2.65 per share later this year. This came after it emerged at the end of last year that the company was sitting on $97.6bn worth of cash. In theory the decision to pay a dividend should be a good thing. It sends a positive message to the marketplace highlighting that the company is performing well which should in turn entice a new wave of investors attracted by the proposition of regular dividend payments. But will shareholders and potential investors see it that way?
Although the payment of a dividend shows the company is performing well it can also show that they have ran out of things to spend their money on so is making the easy decision to simply give it back to the shareholders. It could be argued that it displays a lack of creativity, lack of new ideas and a lack of attractive new investments which could undermine the future growth of the company. Coincidentally it is worth noting that Apple hasn’t released a revolutionary new product since the launch of the ipad over two years ago and there doesn’t appear to be one on the near horizon. Tim Cook (CEO) revealed that the board had been discussing what they were going to do with the pileup of cash for some time. This seems alarming to me that they were struggling to decide what to do with it and sparks images of the Apple board sitting round scratching their heads saying “hmmmm what on earth are we going to do with all this money?”.
Ten years ago shares in Apple could be purchased for a mere $10. The same shares are now worth over $600. As the graph highlights, the shares have almost doubled in value the last year alone. This represents an overwhelming increase in shareholder wealth which, in the absence of dividends, has been achieved solely through extensive capital gains. However April looks set to be the first month that Apple shares haven’t gone up since November 2011. This is coincidentally the first full month since the announcement that dividends were to be reintroduced and may serve to outline the decisions potential to limit future capital gains. What shareholders must be thinking is; as my shares have already increased in value by $198 per share this year why would I be bothered about getting a small dividend of $2.65 a share which may get in the way of my capital gains.
It could be argued that the dividend will provide some obvious tax benefits to shareholders. The split of income across capital gains and dividends allows shareholders to take advantage of two tax free allowances as oppose to one. However the US tax system is set to change in 2013 so that dividends are taxed at the same rate as standard income tax whereas capital gains will continue to carry a preferential lower rate. This could lead to some angry Apple shareholders who in a years’ time may find their capital gains stagnating and meanwhile will be getting taxed heavily on their new dividend payments.
There is some past precedence to say that changing policy to start paying a dividend is not such a good idea. Apple themselves previously paid a dividend between 1987 and 1995, a time in which the company struggled financially and came dangerously close to bankruptcy. Close rival Microsoft experienced extensive capital gains, not unlike Apple currently, when not paying a dividend between 1986 and 2002 but the capital gains have been minimal since the reintroduction of dividends in 2003.
Overall I am surprised that Apple has decided to change a winning formula and bring back dividends. Perhaps it is Tim Cook’s idea to put his stamp on a company that is still heavily influenced by its late founder Steve Jobs. The success of Apple is unlikely to waiver in the near future however this decision has the potential to do more harm than good to shareholder wealth.
