Advertisement

Blog

Cisco’s Paying Dividends; So Should Apple

{complink 379|Apple Inc.} and {complink 1131|Cisco Systems Inc.} share a notoriety: Neither company has ever paid dividends since it was founded. The two also share a notable and admirable quality: They both generate a phenomenal amount of cash each quarter, helping them to build up billions in cash and short- and long-term securities.

At the end of its most recent quarter, for instance, Apple had $27 billion in cash and short-term investments, plus $32.7 billion in long-term investments, and $3 billion in another account, described as “other long-term assets,” giving the company liquid assets totaling almost $63 billion. That pile is growing, and, by the end of this quarter, could be close to or above $70 billion.

Cisco has a smaller but still impressive hoard. The company closed its fiscal first quarter ended January 29 with $40 billion in cash and short-term investments, almost $1 billion in long-term investments, and approximately $4.2 billion of “other long-term assets.” The total, approximately $45 billion, puts Cisco in a very select group that includes {complink 3426|Microsoft Corp.} ($52.5 billion) and {complink 2294|Google} ($36 billion).

Unlike its fellow cash-rich companies, Microsoft pays dividends, returning some of its huge cashflow to investors. Cisco today brought some cheer to shareholders when it announced it would be joining the class of dividend-paying technology company. This is a very positive development for the company and shareholders, as it could help to offset the negative cloud that is beginning to hang over the high-tech sector. The segment generates nice and steady cashflow, but it seems to be running out of options as to what to do with the money.

In case it isn't clear enough already, my position on this issue is that technology companies that generate positive and steady cashflow should pay dividends. Traditionally, investors bought shareholders because of the annual or quarterly dividend payments; this is still, in my opinion, the best reason for buying shares, in any company.

Many high-tech companies have held back on paying dividends for various reasons, including the need to pour funds into innovation, product development, sales and marketing, and also potential mergers and acquisitions. In the case of Apple, executives have even argued that they don't believe in dividend payment because investors are already being rewarded by the continued rise in the value of their investments.

It's true that Apple has outperformed most of its peers on the equity market in the last five years. In the last 12 months alone, shares surged to $364.90 from the 52-week low of $199.25. That's a huge increase any investor should be happy with, assuming they bought the shares at a reasonably low price. However, you need a really strong stomach if you are a retail rather than institutional investor in Apple shares. And this applies whether the stock price is swinging higher or sliding around like a yo-yo, which it has been doing lately: It closed on Friday at $330.67, down from $351.99 at the beginning of the week.

Dividends payment should help with the heartburn of holding Apple stock. I know many people would disagree with the heartburn analogy, but that's what I would have if I owned Apple shares and watched the daily fluctuations in price. Seasoned investors say one should not pay too much attention to the daily movement of a stock's price, but, really, who wouldn't, when the swings are so unpredictable?

The stronger reason why Apple and other cash-rich technology companies should pay dividends is the challenge of managing the billions in cash they generate each quarter. Apple is a manufacturer of products, software, and services, not an investment firm. Its sole purpose is to make money for investors, yet it doesn't offer a clear plan for what it will do with all the profits it's amassing.

Apple can make acquisitions with its huge hoard — and still have a truckload left over. It doesn't need so much money in the kitty. It's time to return some of the cash to investors through dividend payment. And, I assure you, the stock price might even move higher as a result, because it's no secret that dividend payments attract investors. Who doesn't like to receive checks, from any source, on a regular basis?

17 comments on “Cisco’s Paying Dividends; So Should Apple

  1. Anand
    March 19, 2011

    Bolaji,

       You have raised some valid points, regarding why dividend payment is so important. I totally agree with you that dividends should be paid to the investors because dividends bring more discipline to management's investment decision-making.And also the more cash a company keeps, the more likely it is that it will overpay for acquisitions and, in turn, damage shareholder value. Moreover with Dividend obligations to meet twice a year, manipulation of earnings becomes that much more challenging.I hope APPLE will start paying the dividends before it looses support from the investor's community.

  2. eemom
    March 19, 2011

    Bolaji

    I agree that Apple should join Cisco and others in paying dividends.  It is a good faith reward to its loyal investors.  As much as I like Apple's innovative products, their response to why they do not pay dividends does not surprise me.  It is a bit pompous and condescending. I don't know about others but, unfortunately, that is how I see Apple.

    I guess I'm not clear on why these companies keep so much cash on hand.  Acquisitions and innovations do not explain it since they continue to project to add to their pile on a quarterly basis.  Apple's products are manufactured in China, which from what I read, add an obscene amount to our trade deficit since China gets 100% of the product sale.  So, while Apple is getting richer, China is getting richer and the US is further in debt.  How is this fair to the very market that Apple participates in and leads in many ways?  Why doesn't Apple take some of this good fortune and apply to it changing the trade regulations so their innovative products actually result in something positive for the country's financial turmoil.

  3. Ashu001
    March 19, 2011

    Bolaji,

    Great Post!!

    It was as usual filled with tremendous sensibility and wisdom regarding how Investors should look at and approach their stock market investments.

    Only problem is-Nobody at Apple(or even Google for that matter) is listening in to what you have to say here.

    The reason is the interests of Senior Management are not aligned with those of retail investors.With no Dividends in the picture,What incentive does Senior Management have for holding onto Apple stock for the long-term?

    For instance,every quarter Steve Jobs gets thousands of options to cash Apple stock which promptly proceeds to dump on the market for cash;thereby increasing the amount of free-floating stock available on the market.Its a well-known fact the more supply there is of a stock ,the lower is its price(which is what typically happens on days just following Company stock Grants).

    Regards

    Ashish.

  4. bolaji ojo
    March 19, 2011

    Ashish, To be fair, Steve Jobs has not sold any shares in the company since he rejoined Apple in 1997. He reportedly had 5.5 million Apple shares as at the end of 2010. The “company believes Mr. Job's level of stock ownership significantly aligns his interests with shareholders' interests,” Apple said in its last proxy report. We can therefore be sure Jobs is not one of those executives who gets awarded stock and sells.

    This still doesn't justify not paying dividends. Jobs obviously believes the company does not have to pay dividends but I don't think this is because he wants to quickly cash stock options awarded for the performance of his duties. He cannot sell any of his 5.5 million shares without alerting other investors and regulators.

  5. Nemos
    March 20, 2011

    in my opinion, the fairest option would be to reward the long-term investors and to give a large portion of the profits to developing. The real reward is of course to share dividends but also you “must” use a portion of your profits to develop your company. The balance between these two is a viable solution.

  6. Kunmi
    March 21, 2011

    I do not think it's a fair practice for Apple to be like an ocean that wants all the tributries to flow into it without giving out. It will be errorneous to believe that because industry lean towards Apple products so they can hold tight to the stock without paying the dividends! If CISCO could pay dividend, why not Apple? Smart people will not buy and hold stock like Apple's

  7. Ashu001
    March 21, 2011

    Bolaji,

    I have'nt seen exact shareholding Distribution of Apple stock recently.But I have a habit of tracking Insider Stock Sells every month and Steve Jobs(& Larry Ellison) persistently feature at the Top of Insiders selling Stock evey year.They get Stock Options and sell them off immediately.I guess that's why Steve Jobs Shareholding in Apple is Static for last few years.Otherwise,his shareholding should have gone up(with all the Options he has been awarded in last few years…)

    More than anything else lets face the facts-Steve Jobs has to eat too!!!

     

    Regards

    Ashish.

  8. AnalyzeThis
    March 21, 2011

    Bolaji, I agree with you completely… but the bottom line is this: Apple is unique. They operate under a different set of rules.

    To use a somewhat poor analogy, if the tech industry were High School, Apple would be the Star Quarterback. The star QB can get away with things that other kids can't. Teachers aren't going to flunk the QB and cause him to miss the big game, etc.

    It's not fair to everyone else, but that's just the way it is. Apple can (and does) get away with many things that other companies just can't.

    Not many companies can dictate pricing the way Apple can. Not many companies have the rabid customer base Apple has. Not many companies have seen the kind of stock price rise that Apple has.

    Apple Thinks Differently because they are different. It's just the way it is. I'd be shocked if they changed their mind and started paying dividends.

  9. Mydesign
    March 22, 2011

       Bolaji, you are right. Apple Inc. and Cisco Systems Inc. have ever paid dividends, since it was founded. On last Friday, Cisco Systems Inc. said that it’s first-ever cash dividend will amount to 6 % per share and will be paid on April 20.  Last year itself company has said that, it would start paying a dividend equating to an annual yield of 1 % to 2 %. Now they declared the dividend amounts to an annual yield of 1.4 % at Thursday's closing price of $17, which causing a damage of nearly $1.3 billion annually to the exchequer. After the declaration of dividend, the shares were up by 14 cents to close at $17.14 on Friday.

       Normally many of the technology companies like to hold their cash for further investment rather than paying dividends. Microsoft Corp. introduced a dividend in 2003 and now carries a 2.6 % and HP Co., has a yield of 0.8 %. Some of the major technology companies, who haven't paid dividends, are Apple Inc., Dell Inc. and eBay Inc.

       I think (only personal opinion) Apple is also due for a dividend. Apple has more than $24 billion in cash and cash-equivalents in its balance sheet. They are spending most of their money for making acquisitions and their capital expenditures are also low, yet has a huge market capitalization and exceptional growth. Company’s free cash flow is a good metric to analyze the assets. Free cash flow is equal to cash flow from operations minus capital expenditures. Successful companies tend to have high free cash flow because their businesses are profitable enough to keep pulling in cash without requiring much capital expenditure to maintain or grow.

  10. mfbertozzi
    March 22, 2011

    Toms, you have outlined a key metrics to evaluate financial results: free cash. What I have found quite strange is the timelime of dividends sharing; the distribution has started this year and it overlaps exactly a financial crisis timeslot. It could be a strategy to keep close customers and consumer and small investors too?

  11. hwong
    March 22, 2011

    The initial thought that Cisco is paying dividend does not sound like a good strategy because it would mean the dividend is now not being re-invested into Cisco development. Every company needs research and development to further drive technology innovation. When that doesn't happen the stock price also doesn't increase.

    But on second thought, Cisco's stock price has not moved for a LONG time. It's about time that they do something if they want to keep their investors happy. Perhaps having dividends would keep shareholders to prevent stock price decrease. Not a bad thought.

  12. mfbertozzi
    March 22, 2011

    Thanks hwong for sharing your opinions, I am aligned to you, it really sounds as strategy to anticipate stocks up & down and make in the mid terms people and small investors happy in order to “retain” them close, new potential crisis could come.

  13. Ashu001
    March 23, 2011

    Toms,

    Great post and excellent Comparison of various Tech companies today.

    Its quite funny when you look at which companies are the favorites of the Biggest Hedge funds out there-Apple figures right at the top.

    Apple stock reminds me entirely of the Dot com bubble.A selective group of traders are exchanging and pushing the Stock higher and higher and higher everyday until a time comes when there is nobody left to push the stock higher.That's when the problems start.Especially for Small shareholders.

    Regards

    Ashish.

  14. Ashu001
    March 23, 2011

    Dennis,

    Brilliant post!!!

    These were the best parts of the post–


    “It's not fair to everyone else, but that's just the way it is. Apple can (and does) get away with many things that other companies just can't.

    Not many companies can dictate pricing the way Apple can. Not many companies have the rabid customer base Apple has. Not many companies have seen the kind of stock price rise that Apple has.

    Apple Thinks Differently because they are different. It's just the way it is. I'd be shocked if they changed their mind and started paying dividends

    Yes you are right that Apple Thinks differently because they are different;only in that they are percieved differently.Apple stock is held in HUGE quantities by some of the Biggest Hedge funds around,whose only job is to push the stock higher and higher using the Greater Fool theory to the highest degree.Unfortunately when there is no one left to buy,thats when things start to get ugly for those with no stop losses.

    With No dividends retail Shareholders always LOSE with Apple.

    Regards

    Ashish.

  15. Anna Young
    March 23, 2011

    The “fools” who bought Apple shares in the past got rich as a result. Any “fool” who buys today may also end up very rich or poor if the bottom craters. Will it be possible to identify that timing?

  16. bolaji ojo
    March 24, 2011

    Dividends payment is not a sign a company is not investing in R&D. The two are not mutually exclusive and should in fact go hand-in-hand as a company matures. Early in their growth years many high-tech companies enjoy stratospheric rise on the stock market, benefitting early buyers of their shares who may not as a result care about dividends. As a company matures, though, it may not see the same level of stock performance and may be generating enough cash to fund dividend payment and other operating functions. I believe both Apple and Cisco have reached this threshold.

  17. elctrnx_lyf
    March 26, 2011

    Apple is one of the few companies which has large cash but never really shared with the investors. This is may be because they don't really care who is buying their shares or because they are confident that the share holders will always hold their shares even wothout any dividends. If the Apple share is really saturated then it is advisable to actually pay dividends and improve the trust among the investors and at the same with consumers.

     

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.