Should Apple Pay A Dividend?

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Forbes.com, Winter, 2012. This article was written with Oliver Pursche, the Co-Portfolio Manager of GMG Defense Beta Fund. It was part of a series of articles developed under an agreement with forbes.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site, forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

In A Word: No

It hurts me to say this, but I don’t believe that Apple (AAPL), with one of history’s greatest cash hoards ever, should pay a dividend to shareholders.

It hurts because dividends are not only cash in shareholders’ pockets, but they presage above average corporate performance. That is, companies that adhere to the discipline of paying, and in some cases frequently raising their dividend, must engage in a wide range of prudent activities: conserving cash, reducing costs, aligning governance policies and focusing on profits to name a few.

History bears me out on this. From 1973 to 2010, growth dividend stocks returned, on average, 9.3% versus just 1.8% for non dividend payers. Companies who cut their dividend–the equivalent of deciding to limit exercise and eat more–retuned a negative 0.81%.

So AAPL should pay a dividend, right?

Wrong. Mind you, I’m wearing my Beta Fund portfolio manager’s hat and we are long the stock. First, there’s a precedent for some fairly good performers, with similar cash hordes (at least on a percentage basis) avoiding a dividend, with Berkshire and Google (GOOG) among them. Even some relatively unknown companies, have turned in some spectacular performances, as the chart below indicates.

But with AAPL, as with most technology companies, and some non-technology companies too, the symbolic notion of the dividend cuts too deeply at the fiber of the company. It says to shareholders, and most importantly, to management, that a dollar invested in innovation is not worth as much as a dollar given to shareholders for who knows what.

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It says to management and shareholders that the company is transitioning from a growth company to a more mature company. It says that there’s more growth behind the company than ahead of it, anathema for a company like Apple.

It’s worth noting that since earnings were released on January 24 and the cash horde came to light, Apple shares were trading at about $420. Since that time the company has already provided shareholders with a (realized or unrealized gain) of 17%, or collectively, almost $68 billion collectively. If the shares continue their current trajectory–possible, with many sell side analysts with targets over $600–the shareholders will get their $100 billion, and then some.