[To listen to a podcast on this topic, check out this episode of the Eric Jackson Podcast]
I have been a staunch critic of Apple's capital return plan since it started in 2012.
I think it signals to Wall Street that Apple is out of growth ideas, which is preposterous even though it's now a $700 billion market cap company.
According to Horace Dediu, Apple has now done about $150 billion in stock buybacks and about $50 billion in dividends. It's also taken on almost $100 billion in debt. The buybacks do reduce the share count, which increases the stock price. Apple's been about to reduce its share count about 18% to 525 million. Technically that should boost the stock by about 22% (all things being equal). That means that Apple's $131 stock price today - in theory - would be trading around $102/share had they not done the buybacks.
Yet, the dividends make no sense. They're as helpful as Ballmer's one-time special dividend was to Microsoft's stock after the dot com bust. I think I remember some Wall Street analysts defending the dividend component of the Apple capital return plan in 2012 because it would "bring in a whole new class of investors to the stock." Congrats on attracting a few more widows and orphans retail investors.
What brings in (big institutional) investors to a stock is when they perceive that it will go up in value in the short term (see Apple's stock 10 years ago). Money shoveled out the door for dividends creates no value.
And don't forget the cheap $100 billion of debt Apple has to be paid back.
The whole capital return program has been a lot of work on Apple's part to basically do a little bit of stock buyback.
And yet what do the Apple defenders say about this capital return plan compared to potentially using their cash hoard to do M&A instead? They say: it's all about focus.
There are different views on how Apple should do M&A as an alternative path to capital return. Andrew Ross Sorkin advocated a laundry list of deals Apple should do. Several of these names look dated now (Nuance and Research In Motion).
I advocate a different approach. Apple has to be selective. But that doesn't mean they shouldn't take big swings.
I argued that Apple should have bought Facebook for $100 billion in 2011 when they were worth $50 billion privately. I've also made the case for Apple buying Instagram, Twitter, and Yahoo over the years.
Here's a piece I wrote in 2014 called "The Folly of Stand Pat Apple." I implied that Apple should've bought Tesla and asked if Zuckerberg or Musk would do a capital return plan like Cook's if they ran Apple. (Clearly they wouldn't.)
That article reads well 3 years later, although I can understand why Apple preferred to go their own path to self-driving cars (which they assuredly have to do) rather than buy someone else (even Musk) with the baggage that brings.
Apple also clearly should have bought Netflix at different points in time (so should any number of buyers before they grew too big). If Apple is going to have an Apple Music subscription service to replace the dying iTunes per per download biz, why wouldn't they also have an Apple Video sub service? Of course, they will (but way later than they should have). And if they were playing with footsie with buying HBO before AT&T took action, don't try to tell me it wouldn't have been equally or more logical to buy Netflix.
Here was John Gruber's 2014 response to my Folly of Stand Pat Apple piece (in which he refers to me as "Action Jackson"... which he meant as 'action for the sake of action'):
This is the worst sort of advice, suggesting a complete ignorance of everything Apple stands for. (Jay Yarow loves it, of course.) Just buy something. Spend, spend, spend. Acquire. Buy all the spaghetti, throw it against the wall, see what sticks. Wrong. Apple’s model is about focus. Apple wasn’t joking about “a thousand no’s for every yes” — that’s really how they think, what they believe. That’s the DNA.
Only one thing Jackson suggests makes any sense: Apple perhaps acquiring Tesla. I don’t think that’s likely, but I think it’s possible, for two reasons: First, Tesla could be integrated into Apple’s core business — selling high quality, well designed products that work well together. If you can imagine Apple making a car (and I can), then you can imagine Apple acquiring Tesla to jump-start the initiative. Second, Apple and Tesla share a fundamental engineering problem: batteries.
But other than Tesla, who else would it make sense for Apple to acquire for billions of dollars? No answers come to mind. Certainly not WhatsApp — as I wrote last week, Apple already has exactly the messaging platform it wants: iMessage, with hundreds of millions of users.
Conglomeration may well work out well for Facebook. General Electric has done well with that model for over 100 years. But it would be a disaster for Apple. Apple makes acquisitions for integration. Exhibit A: PA Semi — a chump change $278 million acquisition that laid the groundwork for Apple to become the leading mobile semiconductor company in the world.
I agree with Gruber about WhatsApp (and the Tesla discussion) but the rest was wrong then and is wrong now. And as time goes on, history is demonstrating the folly even more of this precious Apple type of thinking.
You can't buy Beats for $3 billion and then say you can't (or shouldn't have) buy Netflix. If Jimmy can work at Apple, so can Reed and Ted.
The reason to rehash these 6 year old debates is because it's likely the Trump Administration is going to allow US companies to repatriate some or all of their offshore cash holdings in the next few months. Tim Cook acknowledged this on the last Apple call. So this debate is going to amp up.
Should Apple do more dividends or use the cash to do M&A?
They should immediately cancel all dividends, wipe out their debt, and (without saying they will) start doing smart, focused, and sometimes expensive M&A.
Investors want to pay for growth. Apple needs to articulate how they're going to grow. They snoozed on Facebook, Instagram and Netflix when they were younger. Those opportunities are probably gone.
They can't miss the next wave of potential companies they could buy.
[No positions]
An earlier version of this article appeared in my Tech & Media Newsletter.
