It’s been a week since Apple Inc. (NASDAQ:AAPL) delivered solid, if not spectacular, earnings, pushing Apple stock up 10%.
The big nugget from Apple’s report, if you’re a shareholder, was the one-two punch of a 16% increase in the quarterly dividend to 73 cents a share and the implementation of a $100 billion share repurchase program as part of the company’s plan to get to zero net cash.
At the moment, the company has net cash of $165.9 billion. The $100 billion buyback takes that down to $65.9 billion; the dividend increase reduces it by another $500 million, leaving $65.4 billion to invest in future products and expansion.
Apple Inc. Shareholders Very Happy
Almost everyone seems stoked about Tim Cook’s capital allocation decisions, especially one of its largest shareholders.
“I’m delighted to see them repurchasing shares,” Warren Buffett said May 5.“I love the idea of having our 5 percent, or whatever it is, maybe grow to 6 or 7 percent without our laying out a dime.”
When you’re making investments by the billions, it’s easy to get excited about a two-percentage-point bump in your ownership interest. Regular Joe’s ought not read too much into Buffett’s statement, because your bump won’t be noticeable.
Over at MarketWatch.com, Pomona College finance professor Gary Smith has written an interesting piece about why the buyback is good news: He considers it a dividend in disguise because it has the same effect, but doesn’t cost you any taxes.
“When a company pays dividends, all shareholders pay taxes, and they pay taxes on all the cash they receive,” Smith wrote May 7. “When a company repurchases stock, shareholders don’t have to sell, and those who do sell only pay taxes on their capital gains.”
While he’s not wrong, he fails to take into account the bigger picture.
What the Buybacks Say About American Capitalism
If the best use of Apple’s cash is to further reward shareholders at the expense of its employees or the implementation of meaningful innovation like Apple 5G, then I believe Cook and company are missing the point about creating shareholder value.
Bloomberg opinion columnist Joe Nocera wrote an excellent piece May 8 about the reasons why buybacks aren’t that simple.
“Henry Ford famously doubled the minimum salary of Ford assembly line workers so they could afford to buy the cars they were making. From the end of World War II well into the 1970s, corporate executives saw their jobs as working on behalf of all their constituencies — not just the shareholders. Not coincidentally, this was also the era that saw the rise of the middle class,” wrote Nocera. “Now the middle class is shrinking as corporate executives instead focus on ‘maximizing shareholder value,’ which in the aftermath of the tax cut bill means doling out billions via stock buybacks and tossing a few crumbs to workers.”
But at least Buffett’s happy.
Apple Inc. Runs Out of Ideas
In many respects, Apple Inc. faces the same problem that Buffett does: Too much cash, too few ideas.
I’m a fan of both Buffett and Cook and their respective stocks, so it pains me to say this, but even though I know 5G isn’t the panacea for most smartphone owners, Apple shareholders are better served if the company put more effort into this kind of innovation.
Why?
Because, just as we’re seeing with Buffett, who seems unable to pull the trigger on a big acquisition, Apple Inc. is losing its stomach for big-picture thinking.
The $100 billion in buybacks might be useful for your pocketbook, but long-term the stifling of innovation (a discussion that’s taken place ever since Steve Jobs died) is terrible for Apple stock — and you can’t put a number on that.
As of this writing Will Ashworth did not hold a position in any of the aforementioned securities.
