If Steve Jobs were still alive, it's easy to imagine that he wouldn't be happy with the recent news out of Apple. He, along with Warren Buffett, Michael Dell and other keen business minds, know that paying a dividend isn't the best way to add value to stockholders' shares, but that's what Apple did. At the current share price, the $2.65 quarterly dividend would equal a yield of 1.7%, nothing that would make hard core income investors place Apple at the top of their list, but there could be more than one reason why Steve Jobs would probably throw one of his famous temper tantrums if he were still here today.
SEE: Value Investing: Common Alternatives to Value Investing.
Dividends make us all feel good. They're called the only free lunch in the investing world, but if you were offered a free lunch providing you paid 15% of the check, would you still call it free? Along with dividends comes the dividend tax. On most cash dividends the tax rate is 15%, so if you're holding Apple in your non-tax deferred account, you're paying that tax each year.
If that isn't bad enough, unless Congress acts to change things, the dividend tax rate is set to triple. Now your free lunch is only free after you pay as much as 45% of the bill. The CEOs who have not bowed to public pressure understand that by paying a dividend they're giving the Federal government 15% of their cash hoard and possibly a whole lot more next year. In an economy where cash is hard to come by and investors measure a company's value by the amount of cash they have on their balance sheet, why give it away? In Apple's case the pile of cash was getting too high, causing investor outcry, but are there better ways to put that money to work?
SEE: Dividend Tax Rates: What Investors Need To Know.
Why Did They Do It?
Rumors have floated around Wall Street that Apple's nearly 74% gain in the past year is largely due to the rumor that Apple would initiate a dividend. Could that be why the day the dividend was announced the stock was met with a tepid response from investors? Since the announcement, Apple's stock is up just over 1%, making investors believe that the dividend was priced in already.
Determined to ask, "what would Steve do?" it appears that Apple got their answer, and it's a good one if you subscribe to the Warren Buffett ways of managing your stock. Along with the announcement of the dividend, Apple instituted a $10 billion share buyback that will start in October and last for three years, according to the March 19 announcement. By decreasing the amount of shares outstanding, the value of those shares rises, but the investor takes on no tax burden. Warren Buffett's company, Berkshire Hathaway, even went so far as to announce the maximum price they would pay for each share in their buyback program, providing an instant boost in value.
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Does This Change Anything?
A recent CNBC survey found that more than 50% of all American households have an Apple product, and with the New iPad setting a fresh round of sales records, there's little doubt that Apple remains a momentum stock. Morgan Stanley recently lifted Apple's price target to $720 and went as far as to say that we might see $960 sometime next year.
At those prices, the 1.7% yield would reduce to 1.1%, surely causing investors to call on Apple to increase its dividend and possibly accelerate its share buyback, but is Apple transforming in to an income stock?
SEE: Your Dividend Payout: Can You Count On It?
The Bottom Line
Apple is still arguably the most popular stock in the world, not just because of its meteoric rise, but because it has changed the way we use technology. Old tech may have seen a resurgence as of late, but no tech name comes close to the quality of Apple - at least not right now.
SEE: Cheap Stocks Or Value Traps?
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