Handicapping an Apple Special Dividend
Dec 6th 2012 7:15PM
Updated Dec 6th 2012 7:22PM
If you've been keeping up with the markets, there's no doubt that you've heard a lot about this fiscal cliff mumbo-jumbo in the past few weeks. While the whole issue could be overhyped, it's true that if we "fall off" the cliff, there will be some notable (and unpleasant) changes for both average individuals and major corporations alike. And that's important to keep tabs on.
Accordingly, many companies have been bracing themselves for the worst, hedging themselves for the worst-case scenario. Apple isn't one of those companies, and its shares have taken a beating for it, as investors struggle to understand the tech giant's fuzzy rationale.
Big businesses proactively address the possible cliff
While companies can spend big bucks lobbying Congress and cozying up to regulators, fiscal cliff talks are a purely political phenomenon; industry has little say on whether politicians will find some common ground. However, companies can control how they prepare for the worst. Specifically, for companies paying a dividend, the elimination of Bush-era tax cuts would see taxes on dividends nearly triple -- from 15% to 40%. For this reason, many major companies have chosen to pay "special dividends" in December, in lieu of those that would be paid out next year. More than three times as many companies declared special dividends this November than last November.
Included in the litany of companies issuing special dividends this month are businesses like Questcor Pharmaceuticals , Las Vegas Sands , and Cisco Systems . The first quarter 2013 portion of Questcor's hefty 3.1% annual dividend will be paid to shareholders around Dec. 21. Not a bad holiday gift! And Las Vegas Sands shareholders are getting even more generous presents, receiving 12 times the usual amount of cash. When the casino announced it was dishing out $2.75 per share on top of the normal $0.25 quarterly dividend, shares quite understandably rallied, gaining 6% by the end of the day. Costco shares enjoyed a similar euphoric day of gains after announcing a generous 7.25% special dividend.
So, what gives? Why would the world's largest and most successful company not follow suit and provide its investors with a safety net?
The mindset behind Apple's confusing indifference
Apple's dividend yield, at nearly 2%, is nothing to balk at. In fact, it's somewhat of a luxury for most Apple investors; a dividend was only announced earlier this year in March, months after visionary CEO Steve Jobs had passed away. You'd think that, of all companies, Apple would be smart about capital allocation, hop on the special dividend train, and do what's right for investors. Perhaps it is, although the market certainly hasn't shared that opinion.
Steve Jobs grew Apple from a struggling has-been to the biggest corporate success in the world with bold and revolutionary product lines that had never been seen before. Apple has been one of the best growth stories of the past decade and, as a growth-oriented business, Jobs wanted to plow money back into the business, not dish it out to shareholders. The trouble was that Apple got so good at growing, it piled up mountains of cash, and investors began to question the utility of that cartoonishly massive horde of dough.
Although the executive mentality at Apple has changed slightly since Jobs' death, it still feels like the company is hesitant to emphasize its dividend too aggressively. The only logical reason -- which may prove wise, or it may not -- that Apple wouldn't dole out a special dividend, would be if the company really didn't believe the fiscal cliff would ever come to pass. Essentially deferring a payment to its shareholders for a few months will allow Apple to use that money for internal projects in the meantime. Or so it goes.
The trouble from an investor's standpoint is the sheer amount of cash that Apple still has on hand. With over $120 billion in the bank, is it really necessary to skimp shareholders on a short-term bet that our government will do what's best for the people? The markets certainly haven't thought so and, after hitting $700 highs in September, the company's shares currently trade in official "bear market territory," having fallen more than 20% from those heights.
That's not to say that the lack of a special dividend is the only reason that shares have been struggling. Investors are worried about contracting margins, increasing competition, and the fiasco that has become Apple Maps. But, surely, giving a little money back to irked shareholders would help to remove some tension.
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy, and reasons to sell, Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
The article Handicapping an Apple Special Dividend originally appeared on Fool.com.John Divine owns shares of Apple. You can follow him on Twitter @divinebizkid and on Motley Fool CAPS @TMFDivine . The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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