Would Apple, Inc. Stockholders be Better Financially if They Received Dividends Annually - Research Paper Example

?Introduction Apple Inc, one of the largest consumer electronics firms in the world has the history of not paying the dividends. Over the period of time, it has been a trend in the technology oriented firms that dividends are not paid and investors largely bet on the growth potential of such firms. Investors invest their money on the assumption that though dividends may not be paid for considerable period of time, the capital appreciation due to growth will significantly justify the non-payment of dividends. The overall direction set up by Steve Jobs for Apple was based upon not paying the dividends and to accumulate a hoard of cash which can be subsequently utilized in terms of making investments into innovation. As a result of this policy, Apple went on to accumulate a large quantity of cash, the returns on which were relatively low and was considered as a drag on the returns on equity for the shareholders of Apple. One of the key reasons as to why Steve Jobs consistently pursued this policy of not paying the dividends is also based upon the fact that Apple barely avoided bankruptcy in 1997 thus Jobs was focused upon maintaining a large pile of cash which can potential avert any possibility of bankruptcy in future. (Shontell, 2011) Apple Inc, however took a new turn and announced that it will be sharing billions of dollars in dividends to the shareholders. This move has been considered by many as a radical shift from Job’s legacy. This paper will discuss whether Apple’s shareholders will benefit from this new dividend policy of Apple or not. Apple’s Dividend Policy and History Apple Inc has a very troubling history as from being a first mover in personal computer industry to the verge of bankruptcy it covered a lot of ground. It is now one of the leading consumer electronics manufacturing firms in the world with products ranging from mobile phones, tablet computers, personal computers, TVs, music players and Tablets. Such diversified range of products has made Apple a leading player in the market. Apple however has also a history of not paying dividends and piling up large hoards of cash to finance its expansion. Steve Jobs, under whose leadership Apple rose to the prominence, was considered as most opposing to paying off the dividends to shareholders as he witnessed the journey of Apple towards bankruptcy also. In order to avoid any such mishap in future, Jobs therefore focused upon piling up cash and neglecting paying the dividends to shareholders. Apple declared its first ever quarterly dividend in 1987 amounting to $ .12 per share however, at the same time, Apple also announced a 2 for 1 stock split too. Subsequently, however, Apple experienced losses and it became a less competitive player in the market. Due to this sliding, Apple gradually reduced paying the dividends and finally stopped to pay the same to its investors despite making a promising start in the early years of its establishment as a leading PC maker in the world. Recent Announcement of Dividends After the lapse of many years, Apple recently announced that it will start paying a quarterly dividend and will spend $45 billions in the next three years in terms of dividends as well as share buy backs. The recent announcement to pay quarterly dividend however also came with the offer of stock buy back thus signaling that Apple Inc might focus on reducing its outstanding shares in the market. (Satariano, 2012) Over the period of time, the cash pile up accumulated by Apple Inc was attracting low interest rates. In an economic environment where interest rates are relatively low thus keeping cash reserves as high as over $100 billions was considered as an imprudent financing decision. Investors therefore were of the view that hoarding such large amount of cash was actually a drag on the return on equity of the shareholders. The recent announcement therefore seems to be an effort towards listening to shareholders and provide them some sort of return in terms of dividends. However, the cash used for the share buy-back as well as dividends will be used from its US reserves as it is suggested that Apple may attempt to avoid tax consequences for utilizing the cash generated from its overseas operations. Analysts also suggest that paying the dividends may help Apple to attract more incremental investment thus providing it necessary cash to re-invest and expand according to its plans. The decision therefore has been viewed favorably however the question remains as to whether Apple Investors will be better off if paid the dividends. Will Investors gain more? If one traces back the monthly share price history of Apple, it will come to notice that it was priced at $24.87 on Oct 31, 19841. However, the current market price of Apple is $626.20 per one showing a growth of more than 2400% over the period of last 28 years. During all these years, Apple hardly paid any dividends, however; not paying the dividends, its stock witnessed tremendous growth. It is important to understand however, that over that period of time, Apple has witnessed worst times too however, its stock has surged very recently specially during last decade when apple entered into digital music industry through its IPod. M&M theorem outlined that paying dividend generously will force a firm to seek outside financing which can increase the overall risk profile of the firm eventually. As such, paying dividends will ultimately raise the debt or equity capital in order to finance the future expected growth of the firm rather than utilizing the existing cash available within the firm. Further, M&M theorem also suggested that paying dividends may add little value to the firm thus discounting the option that paying higher dividends will add more value to the firm. It critically suggested that by plowing back the earnings into the firm, any organization can lessen its reliance on external financing to fund its future growth opportunities. (Eugene F. Brigham & Houston, 2009) This was actually what was practiced by Steve Jobs during his tenure in the office. Theory as well as growth of Apple’s share prices does indicate that the investors have benefited from growth over the period of time. What is also important to note is that Apple’s valuation touched $600 billion figure after the announcement of its recent dividends thus giving the impression that there may be growth in the value if Apple continue to offer dividends. (Kell, 2012) It is critical to understand that fundamentals of Apple are quite strong with a few of the hottest selling items in the history of the world suggesting that Apple will continue to dominate the market in near future. True, its competition is getting tough which may further push Apple to reduce its dividend payments and focus on piling cash to finance its next innovations. However, investors will be relatively better off if they are paid regular dividends by Apple. Conclusion Apple Inc. is the leading consumer electronics manufacturing firm in the world with some of the best brands under its umbrella. Over the period of time, however, it has deliberately resisted all attempts to pay dividends to shareholders and focused more on plowing back the funds to finance its future growth. This strategy of the firm seems to pay off as despite not paying the dividends not only its stocks have surged in value but it was able to finance its growth through internally generated cash. However, Apple’s value increased after it decided to pay the dividends indicating that investors will be better off if Apple pays regular dividends. References Eugene F. Brigham, & Houston, J. (2009). Fundamentals of Financial Management. London: Cengage Learning. Kell, J. (2012, April 10). UPDATE: Apple Market Value Jumps Above $600 Billion Mark. Retrieved April 12, 2012, from The Wall Street Journal: http://online.wsj.com/article/BT-CO-20120410-710983.html Satariano, A. (2012, March 19). Apple to Pay Dividend, Buy Back Stock to Return Some of Cash. Retrieved April 10, 2012, from Bloomberg Businessweek: http://www.businessweek.com/news/2012-03-19/apple-to-pay-dividend-buy-back-stock-to-return-some-of-its-cash Shontell, A. (2011, Jan 19). The Amazing Story Of How Steve Jobs Took Apple From Near Bankruptcy To Billions In 13 Years. Retrieved April 12, 2012, from Business Insider: http://www.businessinsider.com/how-steve-jobs-took-apple-from-near-bankruptcy-to-billions-in-13-years-2011-1 Read More