Apple's Dividend Isn't the Problem


If only turning Apple around was as easy as boosting its distributions.

Barron's over the weekend argued that the solution to making the fallen market darling popular again is to jack up its yield above 4%.

Bernstein tech analyst Toni Sacconaghi feels that 4% is the "magic number" that starts to woo income investors. That would involve nearly doubling its dividend to more than $18 a year.

Apple can certainly afford to be more generous with its ample greenbacks, and it has publicly committed to that. The world's most valuable tech company plans to return $45 billion to its shareholders through dividends and stock repurchases over the next three years.

The challenge for Apple is that it's not as rich as its balance sheet says it is. Apple may have more than $137 billion in cash and marketable securities sitting on its balance sheet, but more than two-thirds of that is parked overseas. Apple would have to pay stiff repatriation taxes if it wants to bring that money home.

This means that even something as simple as paying its stakeholders $18 a share -- or 40% of the $44.84 a share that analysts now project in profitability this fiscal year -- would require digging into its reserves, since less than a third of Apple's earnings are originating domestically these days.

Sacconaghi has a solution, but investors aren't going to like it.

Pay to play
Even before Apple initiated a dividend policy last year, Sacconaghi felt that Apple should borrow between $50 billion and $100 billion to turn right around and offer stakeholders a generous dividend.

Barron's is again leaning on Sacconaghi's plan to take on $50 billion in debt to bankroll a 40% payout, though what was a 2.5% dividend then would be a 4% dividend today given Apple's low stock price and substantially higher earnings.

Yes, Sacconaghi's plan that would have given Apple a 2.5% yield at the time has actually nearly materialized organically with Apple's current 2.3% yield. Somehow that still isn't enough for people.

There are people out there that feel that the company with the greatest balance sheet greenery in the country should turn right around for the greatest debt raise ever.

No. I don't think so. A dividend just isn't that important.

Hard times for Mr. Softy
It was 10 years ago this very month that Microsoft turned heads by initiating a dividend. The stock was in the mid-$20s then, and it's trading just marginally higher now.

Microsoft's annualized return since it began returning money to investors through regular dividends has been less than 2% over the past 10 years. If we account for the taxable distributions along the way, Microsoft's annualized return is still less than 5%.

A dividend didn't help Microsoft.

It certainly hasn't helped Apple. Shares of Apple have fallen 24% since the company announced its payout policy on March 19 of last year.

If anything, one can argue that introducing dividends could be a tech company's "jump the shark" moment.

Obviously, it doesn't always happen that way. Oracle came around to embracing quarterly distributions in 2009 and its stock has nearly doubled in that time. Even Cisco -- a market laggard through most of the past decade -- has beaten the market since it caved in to yield chasers in 2011.

However, their returns really have nothing to do with the move to regularly send out checks to their investors. Oracle has been able to deliver consistent growth in its enterprise software stronghold despite the world's economic hiccups. Cisco has been a bigger mess, but it's been cleaning up nicely lately. The networking gear giant has bested Wall Street's profit expectations every single quarter over the past year.

Apple, on the other hand, has found a way to serve up three consecutive disappointing quarters.

Plan B
Apple thrived through this millennium before it rolled out quarterly payouts. It hasn't gone so well since it started the distributions.

It's merely a coincidence on both fronts. At the end of the day, investors are smart enough to see through the dividend checks. They know that fundamentals can't be bought, even on a quarterly basis. If gross margins miraculously spike on strong revenue growth at Apple next quarter -- and the company suspends its quarterly dividends -- won't the stock spike higher? Of course.

The past 10 painful months have nothing to do with the dividend or how much bigger it can actually be. Apple has disappointed investors. It has fallen short. Margins are deteriorating, and now it's not even offering earnings guidance anymore.

Apple needs to fix Apple. Ramping up its yield -- and especially borrowing money to do exactly that -- isn't the right approach.

Yielding attention
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.

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Longtime Fool contributor Rick Aristotle Munarriz has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple, Microsoft, and Oracle.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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