Apple Is In No Danger Of Becoming The Next Microsoft
This is a recurring theme. It's a commonly posted statement following articles and blogs about whether Apple should or might possibly be about to start paying a dividend.
And it goes something like this:
"When (or if) Apple ever becomes another Microsoft, then yeah...but until then..."
So let's take a closer look at that...
First, I'm not saying Apple isn't a great company. Of course it is. But so many people have fallen in love with this stock, with its nifty gadgets and huge cash hoard, I think they're compromising their objectivity.
I posted this comment following an article by Dan Dzomback titled "The Next Dividend Powerhouse?"
Here is what I said:
"The only problem with it is that starting a dividend would attract the attention of many dividend investors - such as myself.
Why is that a problem?
Because then it would have a payout ratio.
Why is that a problem?
Because Apple could no maintain its image as "the best" once a given percentage of its earnings could be so easily compared to a given percentage of other companies' earnings.
It wouldn't necessarily shine. PG and KO are great long-term investments because of the tremendous boost their dividend growth has provided. Apple would at best be one of these.
Other companies would necessarily outshine Apple as dividend investments.
Target has raised its dividend year in and year out for 40 years now - yet has a payout ratio of only 24%, which gives it a current dividend yield of 2.3%.
Apple earned $27.68/share last year.
If Apple had a payout ratio of 24%, it would have a dividend yield of 1.75%.
INTC currently has a payout ratio of 32% and a dividend yield of 3.4% at its current price.
If Apple had a payout ratio of 32%, its dividend yield would be 2.34%.
CVX has a long, long, history of dividend increases. But its payout ratio is only 22% - and its dividend yield is 3% currently.
If Apple had a 22% payout ratio, its dividend yield would be 1.61%.
These are differences in valuation. If Apple started a dividend, some investors with a long-term perspective might - MIGHT - buy Apple. After all, many still buy PG and KO, knowing that 10 years from now, if future dividend growth is anything like past dividend growth, their yield on cost will be exceptional.
The question that must be asked, however, is can you count on Apple to maintain its competitive advantage in a fiercely competitive industry for the long, long, term, the way KO and PG have?
For BOTH current AND future dividend yield/growth, why would you choose Apple over, say, CVX, which gives you almost twice the current bang for your buck at the same payout ratio currently, and which will almost certainly continue to grow that dividend at a rapid clip?
Apple is better off without a dividend. That makes it a little more trouble to make these comparisons, and I doubt if many people do.
If Apple had a dividend, that would change...."
...and lo and behold, so predictable, as I was getting ready to go to work at 4AM this morning, there it was, a few comments down.
Another "...Once Apple really does (if it does) become another Microsoft, then it will be time to pay a dividend...."
I posted this in response and went to work:
"Microsoft (MSFT) yields 3% with a payout ratio of 23%.
If Apple had a payout ratio of 23%, its dividend yield would be 1.68%."
Like I said, Apple is a great company. I don't dispute that. I made reference in my first comment posted that it would be more in the league that KO or PG is in if it paid a dividend. They're great companies, too.
And I should have mentioned that if Apple had a payout ratio identical to either PG or KO, its dividend yield would actually be slightly higher than theirs. Of course, Apple is a tech company at the very top of its game. In a brutally competitive industry.
The hounds are baying, and competition is heating up. As I inferred in my first comment, good luck maintaining that competitive position for the long, long, term, Apple.
Nifty gadgets, a huge cash hoard, and a great run can cause people to lose their objectivity.
Is Apple really that far ahead of the pack as a moneymaking powerhouse?
I think if you've read this far, you're getting my drift. Many companies, as I pointed out in my comments, far outclass Apple as moneymaking powerhouses.
Don't let that huge cash hoard fool you.
Microsoft has a cash hoard of $57.403B as of its last balance sheet.
Big deal, huh?
Well, if Microsoft had, like Apple, hoarded all the money it spent on dividends and share buybacks over the last 5 years (just FIVE YEARS!!) 2007-2011 (fiscal year ended in 2011-06) it would have a cash hoard that makes Apple's look little.
It would have a cash hoard of $151.734B..
Instead, it has returned $94.331B to shareholders through buybacks and dividends since 2007 alone and still has a cash hoard of $57.403B as of its last balance sheet.
So, while Apple shareholders have a misguided worry about "Apple becoming another Microsoft", perhaps Microsoft shareholders would be far more justified in worrying about Microsoft becoming Apple.
I own shares in neither...but I am well aware of which one is the moneymaking powerhouse compared to the other.
I have to get up at 4AM to work again, but before I go I'll make just one more observation.
Without the last 5 years' worth of share buybacks and dividends, IBM would have a cash hoard of $82.365B.