Apple's Dividend Strategy Divides Investors

CUPERTINO, Calif. ( TheStreet) -- From iPads to iPhones, Apple ( AAPL) investors have had plenty of new gadgets to contemplate, but the tech giant's dividend strategy continues to be a touchy subject.

Apple stopped paying dividends in 1995, preferring to focus on growth at a time when the company was facing stiff competition from the likes of Microsoft ( MSFT). A decade and a half later, though, Apple is an undisputed tech heavyweight, recently surpassing Microsoft's market cap and exiting the second quarter with more than $41 billion in cash and investments.

Now, some investors are clamoring for a share of the wealth.

"I feel pretty strongly that Apple should pay a regular dividend to shareholders," said Apple investor Scott Grannis in an email to TheStreet. "The size of its cash haul is now so big that it is difficult to justify."

Grannis, who writes the Calafia Beach Pundit blog, warned that a vast pool of cash could prove risky if not managed properly.

"Too much cash on hand can lead to the temptation to make ill-considered acquisitions," he wrote. "We've seen that happen with a number of tech companies -- for example, Microsoft and Google ( GOOG)."
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Apple CEO Steve Jobs was asked whether the company would issue a dividend during the company's annual investor meeting earlier this year, but Jobs reportedly said that the cash haul offered security and flexibility. The turtleneck-loving Apple chief also implied that the company's share price would stagnate if it offered a dividend, according to Seeking Alpha.

Grannis, however, is not alone in calling on Apple to rethink its cash strategy, particularly given its ability to grow without major M&A. The iPhone maker typically makes small, tuck-in acquisitions and spent just 3.1% of revenue on R&D last year, compared to Microsoft's 15%. At the same time, Apple's products are flying off the shelves -- the company brought in revenue of $13.5 billion during its recent second quarter, up from $9.08 million in the same period last year.

"I think it has gotten to the point now where they are hoarding money for no good reason," Chad Brand, president of Peridot Capital Management, told TheStreet. "For an investor, it's frustrating."

Brand explained that Apple could easily hold some money back for acquisitions and future growth, while still rewarding investors. A share buyback, as opposed to a dividend, would be the best approach, he added.

"The buyback would be immediately accretive to earnings per share, which would boost the stock price, whereas a dividend would push the stock down by the value of the dividend," explained Brand, who writes the Peridot Capitalist blog. "A negative for shareholders is also that the dividend is taxable."

Dividends are nonetheless becoming more common in the tech sector. Networking giant Cisco ( CSCO), like Apple, is famous for steering clear of dividends, but Cisco is planning to offer a dividend at some point in the future. Software giant Microsoft also reversed its dividend stance and made its first payment in 2003.

Not all Apple investors, though, think that this is the best way for the company to go.

"What I would like to see is Apple using its capital to extend its product line," Michael Yoshikami, chief investment strategist at YCMNET Advisors, told TheStreet. "I would rather have them invest the money for me than give me a dividend that I invest in a savings account, making one tenth of a percent."

Yoshikami explains that more mature companies tend to offer dividends.

"Cisco is further along in its lifecycle than Apple and Microsoft is a fairly mature company," he said. "It just doesn't seem to me to be the right time for Apple to be giving dividends."

Sure enough, tech's best-known dividend payer is also one of the sector's oldest names. IBM's ( IBM) board recently increased the tech giant's quarterly dividend to 65 cents a share. With the dividend payment, which will be made this week, IBM will have paid quarterly consecutive dividends every year since 1916.
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Apple, however, is a very different animal to IBM, and needs money to fuel its phenomenal growth, according to Yoshikami. A cash haul of more than $40 billion might seem like a lot of cash but is crucial to the company's future, he added.

"Frankly, Apple is a company that likes to have a lot of flexibility, and that amount of cash in the bank gives them all the flexibility in the world," explained Yoshikami.

Investor Daniel Hung, who writes the Curious Investor blog, also voiced his concern about the "psychological" effect of a large Apple dividend.

"Apple hasn't been imprudent with its cash and hasn't shown a tendency to make irrational acquisitions," he wrote, in an email to TheStreet. "To some degree, I'm willing to let them hold onto the cash knowing that its sentimental value attracts investors and supports the current share price."

It seems unlikely that Apple's strategy will change anytime soon. The tech giant did not respond to questions from TheStreet asking whether a dividend or share buyback is in the company's future. An Apple spokeswoman, however, referred to TheStreet to Jobs' comments at this year's annual investor meeting.

One thing is for sure, though. Apple's stock has skyrocketed, rising more than 1000% in the past 10 years, and it seems that many investors value share price over dividend payments.
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-- Reported by James Rogers in New York

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