Apple Collapses 6% on No Special Dividend? No Chance

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Oracle has recently joined the ranks of companies paying out dividends early, also known as a special dividend, announcing it planned to pay out next year’s dividend this year, a total of $867 million to shareholders before year's end.

Las Vegas Sands (NYSE: LVS), Costco $7 a share, Wynn Resorts (NASDAQ: WYNN) $7.50, all announced special dividends.

Why All The Specials?

That’s pretty simple; companies are anticipating higher dividend tax rates in 2013 as President Obama tries to raise money to pay-off the government debt. Many American companies have built up huge cash positions, and this is probably the best time to get their shareholders the money, especially-

1)      those investors for who treat stocks as an income producing asset (i.e.- use the income to pay-off needed bills

2)      for insiders who own tons of shares, and want to fund extravagant lifestyles without selling stock. (Larry Ellison of Oracle and Steve Wynn for example)

Apple Falls

According to this columnApple (NASDAQ: AAPL) shares, which are down nearly 5% today as I write this, have partially fallen because they have not announced a special dividend. "As soon as funds became convinced that (Apple CEO) Tim Cook wasn't going to participate (in the special dividend rush), they began transitioning out of Apple for the short run." 

Okay, now I’m perplexed. Apple already pays a dividend, and despite having the largest wad of cash in the world, management is under no guideline that they must distribute the funds. It can stay on the balance sheet for all I care.

So, let's do an analysis of the situation: if investors are selling off the stock to the tune of 5% because they haven’t announced a “special,” then investors are being completely irrational and it represents a buying opportunity.

Or, a group of people are selling a large chunk of shares for reasons privy only to them and offering this as an excuse to well-placed analysts who get might try to get the public, or less savvy hedge funds to buy their shares based on what they want others to think is "irrationality." I’m no conspiracy theorist, but based on the history of big player honesty in the market, this would be relative child’s play.

Do Dividends Really Matter?

Yes and no. Dividends take capital from a company’s balance sheet, distributing it to their shareholders, and the price of the stock adjusts downward automatically to account for the payout.

On the other hand, with all the financial shenanigans done by Wall Street accountants, a dividend is a sign of a viable company that is actually producing results and cash.

Buffett

It was recently asked of me in response to the following column why Warren Buffett of Berkshire Hathaway (NYSE: BRK-B) likes dividend producing stocks, but doesn’t pay one.

Well, as I wrote above, buying into a dividend payer means Buffett is buying an equity that is less likely to be cooking their books. Also, Buffett has announced on numerous occasions he would issue a dividend only if he didn’t believe that he could invest that money at a higher rate of return than his shareholders could. (which is unlikely given his historical track record)

Also, the notoriously tight fisted Buffett doesn’t payout because he doesn’t want to have his investors pay taxes on the money. 

Dovetailing Back

So what about the companies that do pay? Wynn Resorts and Las Vegas Sands are in the process of building multi-billion dollar casinos in Asia and taking on debt to do so. Taking on debt while releasing cash? Why? Does this make any sense? Surprisingly, the answer is quite possibly.

1)      Management wants to placate investors

2)      More importantly, it’s possible management wants to take on debt at historically low rates, believing, quietly believing that interest rates and inflation will be rising dramatically. 

Take Away

What I hope you take away from this is a better understanding of dividends, and the reasons behind them. As for the Apple sell-off, it's either a buying opportunity or a seller PR scam. Just be aware when you hear “news” that a lot of it might be empty hype, or worse, misinformation.

For a different opinion on special dividends, please read fellow Fool Maxxwell Chatsko’s column.


margiecfl owns Apple and Berkshire Hathaway. The Motley Fool owns shares of Apple. Motley Fool newsletter services recommend Apple and Berkshire Hathaway. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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