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truthisntstupid (80.57)

Apple Is In No Danger Of Becoming The Next Microsoft



November 15, 2011 – Comments (10) | RELATED TICKERS: AAPL , MSFT , IBM

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.


10 Comments – Post Your Own

#1) On November 16, 2011 at 3:08 PM, buffalonate (56.14) wrote:

Apple's dividend probably wouldn't last too long anyways.  The business they are in is too cyclical to pay big dividends.  They are the flavor of the month now but then RIM was too a few years ago.  Apple should use that money to buy a company that can provide more consistent revenues that will help get them through the lean times. 

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#2) On November 17, 2011 at 12:05 PM, truthisntstupid (80.57) wrote:

I realize they're the flavor of the month...or year...or whatever now.  I also think they're possibly peaking, or have already peaked.

Yet even though they are at or not far past their peak, there are many other companies that earn far more for each investment dollar spent.

AAPL earned $27.68/share. At today's price of $382.04, that's an earnings yield of a hair under 7.25%.

2.05 shares of CVX at $101.20 will give you the same $27.68 in earnings.  That's an earnings yield of 13.34%.

So will 10.10 shares of Microsoft at $25.83.  That's an earnings yield of 10.56%.

Obviously to invest in Apple is to invest in great continuing growth.  That continued fantastic growth is by no means likely in the long term. 


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#3) On December 03, 2011 at 6:40 PM, truthisntstupid (80.57) wrote:

MSFT has a market cap of just over $212B.

AAPL has a market cap of just over $362B.

But based on the above facts, unless Apple can keep its blistering growth pace up (which I doubt) I bet if Microsoft stopped dividends and buybacks, Microsoft could hoard enough cash to buy Apple before Apple could hoard enough cash to buy Microsoft.

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#4) On December 03, 2011 at 6:45 PM, truthisntstupid (80.57) wrote:

"...based on the above facts..."

I mean the facts I've presented in this blog.

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#5) On December 07, 2011 at 4:42 PM, SkippyJohnJones (< 20) wrote:

Very provocative thoughts!  Thanks for coming at this from a different angle; I haven't read this type of analysis anwhere else.  

I am long AAPL.  I am long CVX.  Both sit in my retirement IRA, so it makes me happy that you contrasted specifically these two businesses. I own the two for very different reasons, but believe in the abilities of both companies to grow revenue, profit, and cash flow.  I have a couple of counter points that hopefully don't come off as fanboyish.

1)  I project Apple to make MUCH more than $27.68 next year.  I think anyone who is being honest with themself thinks the same.  The trendline will flatten out, but this engine still has quite a bit of growth in it (in terms of absolute dollars).  I can hash out the reasons if you disagree, but I take it as granted.

2) Cash generation is similarly accelerating, especially compared to the stalwarts you mention in your case. 

3)  Apple has no reason to sit on $82B.  Unlike MS, they have no history of expensive acquisitions.  They could at any time issue a special dividend worth much more than what a payout ratio argument can model.  This strategy is a big part of why MSFT has paid out as much as they have in the past several years.

 4) Investors typically don't invest in dividend stocks SOLELY for the dividends.  The payments are a nice bonus when they yield a modest 2-4%.  None of the businesses you listed are REITs or strict income instruments.  Each investment election stands on its own merit, including the dividend.

 5) I feel that a dividend would attract additional investors.  Many funds have specific investment rules, including several that require income from all equities.  For these funds, Apple is not a candidate today.  


Regarding your comment #3, it's actually pretty easy to answer. Apple generated 37% more Operating FCF in the last year than Microsoft.  With FCF growth accelerating, a catastrophic AAPL share price collapse would be required for Microsoft to buy Apple.  Remember, a company (assuming no leverage) needs only to pay for the EV, not the full market cap.  The current EV for Microsoft is $173B, Apple's is $337B.  It's roughly twice the tab, and Apple is generating more cash.

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#6) On December 07, 2011 at 5:01 PM, truthisntstupid (80.57) wrote:

Thanks, Skippy!

I wrote theis in response to all the comparisons coming off sounding like Microsoft was dead.  MSFT is only a CAPS pick for me, so I have no emotional attachment to either one.

I didn't look at their individual free cash flows from last year, although I was staring right at them while I was tallying up the amount MSFT spent since 2007 on dividends/buybacks.

For whatever reasons, Apple has taken much, much longer to accumulate that $80B or soin cash and investments than it would have taken Microsoft to accumulate twice that amount absent dividends/buybacks.

I'm just fascinated that this fact gets ignored so much that apparently nobody even knows it because they don't even seem to want to.

Thanks for commenting!

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#7) On December 08, 2011 at 4:59 PM, SkippyJohnJones (< 20) wrote:

No problem - it's nice to have a civilized discussion for a change.  So many of the articles, and the comments that follow, are light on fact and heavy on opinion.  I didn't even realize there was a forum for blog posts on TMF. 


I agree, Microsoft is not dead, nor has it ever been.  I just finished reading another tired article about how the stock has been "dead money" for a decade, completely ignoring the income from dividends or the compounding effect of reinvested dividends.

I also believe it is very lazy whenever analysts or pundits talk about tech dividends as a signal of stagnation or weakness.  The implication is that investors will walk off in droves if the company decides that it has no better use for its cash than to share it with equity owners.  While dividends typically coincide with a maturation, they are the ultimate show of strength.  A company with weak prospects will hoard cash, not return it to shareholders.  Cutting a dividend is the ultimate show of weakness, which I believe is ultimately what leads companies to such conservative payout ratios as 20-25%.


Microsoft's problem is that it is essentially viewed as a utility.  Nobody believes in the company's ability to innovate anymore.  They haven't put out a major new product in a long time, and most of their acquisitions have gotten them nowhere.  So much of their revenue comes from two product lines, and they are so big that new services don't really move the needle.  In that way it's a victim of its own success.  

 Apple will eventually share these traits, and I think many investors already believe it does (despite the reality of explosive growth unfolding each quarter).  The key difference is that Microsoft's key products are the ones perceived to be cannibalized by today's largest tech trends (cloud and mobile), while Apple's are riding the wave.  I believe Apple will eventually top out, but do so at a level higher than it is now (in terms of revenue/profit/FCF/EPS).  After topping off, I believe it will see the same kind of flatlining that has plagued Microsoft. But like Microsoft, it will be flat at an extroardinary level and throw off more cash than it knows what to do with.  Fortunately the company's biggest profit driver (iPhone) is a product that enjoys a two year replacement cycle.  Because the company does not look to acquisitions as a mode of growth (biggest ever was bringing Jobs and co. back into the fold with NeXT at less than $0.5B), I believe the company can be much more aggressive once it does institute a dividend or buyback program.  They could easily return 50% each year or do periodic major special dividends.


In short, I'm not bullish on MSFT, but neither am I bearish.  If I were a sell-side analyst, I'd call it a market perform.   For AAPL, I see massive upside to earnings for the next 2-3 years, matched with a PE ratio almost exactly in line with the S&P average.  To me, it's the easiest stock in the market to hold today (despite its lack of dividend) because of this unique combination of high growth and moderate valuation.  I believe It's a growth stock priced like a blue chip.

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#8) On December 08, 2011 at 5:21 PM, truthisntstupid (80.57) wrote:

Hi Skippy,

I hope for all of Apple's investors that Apple does eventually share the same traits.  MSFT is a cash cow!  

Maybe I should have said "Apple is in no danger of becoming the next Microsoft - yet!"

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#9) On December 20, 2011 at 9:02 PM, valuemoney (< 20) wrote:

MSFT is a steal at current levels and should be bought.

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#10) On December 20, 2011 at 9:10 PM, truthisntstupid (80.57) wrote:


Not only don't most people know, you can't even tell them...

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