Apple's iDivi signals maturity

Apple's iDivi signals maturity

Summary: What is Apple doing with its cash pile? Here's the first shot analysis.


I cannot recall any company that has come back in the way Apple has from its near death experience in 1997. Such is life in the reality distortion field created by Steve Jobs &Co.

Earlier today the company announced the intention of a quarterly $2.65 per share dividend coupled to a $10 billion share buy back program. But before anyone runs away with the idea this is good stockholder news, it is important to read the timing of these events. From the blurbs (my emphasis added)

...the Company plans to initiate a quarterly dividend of $2.65 per share sometime in the fourth quarter of its fiscal 2012, which begins on July 1, 2012.

Additionally, the Company’s Board of Directors has authorized a $10 billion share repurchase program commencing in the Company’s fiscal 2013, which begins on September 30, 2012. The repurchase program is expected to be executed over three years, with the primary objective of neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.

At first blush, this looks like a conservative rather than bold gesture but in line with some analysis. From the WSJ:

Bernstein Research said a meaningful dividend of 2.5% to 3% would have no impact to Apple's earnings or cash flow.

From Forbes:

Contrary to dividends, buybacks can be scaled back easily if Apple needs to save cash for its own investments or acquisitions. Dividend cuts are lived like personal tragedies for income investors. Barely anybody notices decisions to cut or cancel buybacks.

In reality, Apple is handing back $45 billion of its estimated $100 billion cash pile. It also allows Apple to repatriate cash at a relatively low tax rate in advance of government plans to hike taxes for companies that earn substantial profit from overseas.

Among the announcements, Apple's plans to rev up its enterprise sales efforts caught my eye. In recent times, Apple has scored significant deals with SAP, GE Healthcare and United, racking up sales in excess of 34,000 units of iPad to those buyers alone as the iconic tablet becomes the Blackberry of the future in business environments. This must be a worry for smartphone and PC vendors alike. Last quarter, both Dell and HP took baths on their PC sales while Apple continued to rack up record sales of its iPad 2. On the conference call, the company said it had a 'record weekend' for sales of its new iPad. Heck - I bought one as did Jason Perlow who has gone positively fanboyesque over the latest object of our collective desires.

The bigger question though is what Apple does with the remainder of its cash pile. Traditionally, Apple has shunned mega acquisitions. That only leaves one thing it can (and should) do: use its cash pile to invest in its supply chain. Apple is now so big that mastering its already well oiled supply chain machine serves it well in meeting anticipated demand going into the future.

All in all? A prudent and conservative use of cash that signals a company growing up at Internet speed.

Topic: Apple

Dennis Howlett

About Dennis Howlett

Dennis Howlett is a 40 year veteran in enterprise IT, working with companies large and small across many industries. He endeavors to inform buyers in a no-nonsense manner and spares no vendor that comes under his microscope.

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  • Considering the speed of the cashpile growth, it will continue to increase

    ... this year and ever later.

    This is because they will spread their $45 billion program into three years, which still ensures that the cashpile will grow like crazy and will end up with like $200 billion in two-three years.

    So this whole dividend/buyback thing is [b]just to calm the whining voices down[/b], and nothing more.
    • Stand and deliver

      The Treasury isn't happy collecting income tax on the dividend income shareholders get, or capital gains tax that the shareholders pay when they sell their shares. The Treasury wants to take another cut before the shareholders even see any of it. To limit that, Apple wants to keep the cash paid out limited to the cash they make in the U.S., so that they don't have to pay another 30% tax on it. So they don't really have the entire cash hoard to play with. The other countries where they sell stuff expect Apple to pay taxes in their country, too. After all, it was their citizens who bought the Apple products that made them that money.

      The Treasury treats it like Apple is committing a sin if Switzerland doesn't charge as high an income tax rate as the U.S. does.
      Robert Hahn
      • Factual inaccuracy in original article

        Note to Dennis: Robert has it right -- the dividend/buyback will NOT "allow Apple to repatriate cash at a relatively low tax rate in advance of government plans to hike taxes for companies that earn substantial profit from overseas." In fact, quite the opposite. The amounts are set specifically so that Apple can wait for a (hoped-for) tax holiday to repatriated non-U.S. cash.
  • Seems to be some contradictions

    @david - I'm getting a conflicted message here. My understanding is the treasury 'plans' to hike the tax rates so that there is no advantage to keeping profits offshore but that it hasn't been fully enacted yet. If that is incorrect then OK. On the taxes paid in other countries, I do know the US has a series of double taxation agreements so Apple can offset what it pays in (say) UK/DE etc against its US domestic liability. I imagine it would take advantage of that given its overall low rate of tax.
    • Yep

      I think you're right, and of course the Treasury Department does not get to set tax rates. Somehow I doubt that the tax plans of Obama's Treasury Department are going to be enacted by the House, which must originate all revenue measures.

      The proposal is basically another way to appeal to stupid people while killing jobs in the United States. It does that by reducing the incentive to do export business, which is how one earns money overseas in the first place.
      Robert Hahn
      • "The proposal"?

        @Robert -- to what proposal do you refer? There are no serious proposals -- from the White House, Congress or the Treasury -- to raise the tax rate on dividends sourced from overseas subsidiaries.

        Neither Dems or Reps want to kill jobs. They want to get re-elected, and this is a year in which both parties agree that tax rates should be either held steady or reduced. They want to monkey with rates and/or exemptions in different ways, but there's no talk of raising top-line rates.

        And in Apple's specific case, there are no U.S. factories owned by Apple. Export business is not a relevant issue.

        What is relevant is that all U.S. MNCs have shell companies that technically "own" the IP rights or underlying technology of these products. Other subsidiaries pay those companies fees to use the IP rights. It just so happens that these shell companies are in zero/low corporate income tax (CIT) rate countries.

        Those companies then pay dividends to their parent companies, which are in countries where the dividend is treated as if it came from countries where a full CIT was paid, even though the shell companies usually have special exemptions with their host country.

        So at that point the money gets stuck and can't get back into the U.S., because the U.S. Treasury refuses to accept that "as if paid in full" treatment.

        So at that point profit that had been taxed at no more than 10% (in almost every case) gets stuck in overseas accounts.

        The U.S. Treasury would like to collect tax on that income, while businesses would rather not pay such a tax. Both entities are doing what comes naturally to them.

        But in no event is it about jobs. Or stupid people.
      • Companies are in the business of maximizing revenue

        I should also add that MNCs have other methods to minimize tax. The most common one is that an overseas subsidiary will hire a "contract manufacturer" in China to produce goods. Those goods are then sold to another subsidiary. Whichever subsidiary is in a low-tax country (and that is never by accident) will be the company that buys the product at a low rate and then re-sells to yet another subsidiary in a high-tax country in which the product will be sold. The net effect is that the low-tax subsidiary is very profitable but pays low tax, while the high-tax subsidiary has negligible profit (re-sells the product to the end consumer at a very low markup over the cost of purchase from the sister subsidiary).

        All of this is perfectly legal, of course. Finance teams know how to follow the rules.

        But let's not be naive and think that MNCs (be they Apple or any other entity) pay anything more than the lowest global corporate income tax rate they can after jumping through every possible loop.

        That's neither good nor bad, it's simply the nature of companies as profit-making entities.
      • Common CIT rate for Dutch entities with Singapore branches

    • Politics + tax policy = contradictions galore!

      @Dennis -- You???re totally right that pols say many contradictory things on this issue, but the odds of a static rate outweigh the possibility of an increase by 100 to 1, at the very least. In fact, even a lowered tax rate is also more likely than an increased one.

      Both the Dems and Rep would like more cash to be repatriated, on that they agree. The Rep position holds that a tax holiday (temporary or permanently lowered tax rate) would increase repatriation and in turn stimulate the economy. Bush actually tried that in 2004. The money came in but the holiday wasn???t linked to formal/legal commitments by beneficiary companies to actually increase hiring, so the expected benefits in terms of new investment and incremental job hiring by MNCs in the U.S. as triggered by the holiday never materialized. Dividends, net profit margins and employee bonuses fared well, perhaps unsurprisingly.

      There was talk late last year of trying this again as part of a Dem-Rep grand deal for comprehensive tax reform and a new budget deal. But that proposal died in (super)committee and the economy started to (seemingly) improve, so that is almost certainly off the table for any time prior to the 2012 elections.

      If the Dems keep the White House and the economy does falter, a temporarily lowered rates could be in the works. But the most likely scenario is that the Dems would show MNCs they intend to stay pat, signaling that no change will occur for 4 years (barring economic disaster) and that the MNCs should therefore stop stockpiling and start repatriating.

      If the Reps take the presidency, a lower rate would be quite possible, regardless the state of the economy.

      A higher rate on repatriated cash pretty much doesn???t show up in any realistic scenario. There is a permutation in which the Occupy movement goes national and gains such widespread support that Congress has to go along and actually raise the rates, but that???s an incredibly unlikely scenario. You might hear a couple of politician suggesting their opponents are secretly planning such a move, but it???s essentially a non-starter in reality.

      One last note, Treasury can make such changes (up or down) only when told to do so by Congress.
  • What signal does this send?

    Normally when a company starts giving dividends this is a signal that growth has ended and it's time to sell the shares.

    Is Apple on its way to becoming a dull but safe company rather than a dynamic growing one?

    On the other hand you could see it as the most sensible thing to do with excess cash. Acquisition pleases the markets but is strategically questionable (cf Compaq, Oracle), R&D is regarded by the markets as too risky.

    However maybe there is another way. I have long been puzzled by why I should pay more for Apple products when basically the use the same components as everybody else. The operating system is different, but not really different enough for the differences to be interesting.

    But what about the ethical question? I am prepared to pay more for Fair Trade coffee and fish caught from sustainable stocks. If the premium Apple charged was converted into fairer conditions for workers at Apple suppliers, provable assurances that Apple products are environmentally friendly and fully recyclable then I might be prepared to pay the premium prices Apple charge, because I could see I was actually getting something for my money.

    As present the Apple badge seems a little like the premium price paid for the VW badge on a Polo built on the same production line, with the same specification, as a SEAT Ibiza.
  • American Spectator and the Heartland Institute

    Using as evidence the commentary of a writer working for two avowedly conservative entities to support the claim that corporate tax hikes are on the way is sloppy, at best. Witness the opening line of the reference:

    Q: When can you be sure President Barack Obama is proposing a tax increase?
    A: When you hear him propose a tax cut.

    In other words, the author quite frankly says: "I hear the words tax cut, so I know it's a tax increase." On a literary level, the line is funny and amusing, but hardly evidential on a journalistic level.