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Why Apple Should Not Give-in to Special Dividend Demands

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

I asked recently if Apple (NASDAQ: AAPL) is the most manipulated stock on the market. On Wednesday, that Apple shares experienced their largest single day drop, losing over 6% of their value while shedding $35 billion in market cap, it was a legitimate question to ask - especially since it occurred on essentially no news. What was the cause?

Depending on who you ask, investors will be given a host of reasons, one of which being the easy scapegoat of “manipulation.” But I don’t buy it. On the other hand, I am willing to consider the more obvious reason and those that suggest investors are running from the tax man. If true, they might also be running from future gains.

Is a Special Dividend Good or Bad?

It depends on who you ask. In other words, with the fiscal cliff overhang causing such anxiety on the market, I’m willing to buy the explanation that the recent sell-off in shares has been more the result of investors getting angry that the company has opted not to pay a special dividend.

Although it is worth noting here that Apple has not come out and explicitly stated that it won’t. The question is does it make sense for Apple to do it? Logic says yes. After all, what other reasons would there be for publicly-traded companies to exist, if not to look out for the benefit of shareholders?

The fiscal cliff has increased the urgency with which many companies are working to minimize the tax damage. This is assuming that congress does not come up with a resolution. To date, over 120 companies have accelerated their dividend payments to help shareholders keep more of their money ahead of anticipated rate hikes, which might jump from 15% to as high as 40% (in some instances).

There have also been cases such as Oracle (NYSE: ORCL) where the database giant accelerated its next three quarterly dividend payments into December. It seems extreme. But I can’t fault Oracle or any other company for taking such measures. And it’s not as if shareholders wouldn’t have gotten the payments anyways. It just arrived earlier than usual.

In my opinion, any time a company has excess capital, shareholders have as much right to it as any other means of use. After all, many of these companies would cease to exist had it not been for the capital infusion supplied by loyal investors. So if some companies have opted to consider the interest of investors, that’s a good thing. Isn’t it?

Should It Be Paid at the Risk of Sacrificing Growth?

In the case of avoiding the fiscal cliff, if any company can find (legal) ways to maximize the value of the capital returned to shareholders, then they are exercising their fiduciary duties. I don’t see how any company, or in this case Oracle can be faulted. But at what cost?

Not many companies are able to grow like Apple. In other words, Apple has much better use for its cash than Oracle. This is meant as no slight to the database giant, but Oracle’s growth rate does not even begin to compare to Apple’s business. Besides, what would investors really gain other than some quick cash?

Sure, the cash upfront will be nice. However, both Apple and its investors might lose out on the back end. Worse yet, the idea that investors are selling the stock now ahead of the anticipated rate hike seems ill-timed. I don’t think anyone truly believes that congress won’t get a deal done.

Having said that, I can also appreciate that investors want to take their gains from Apple, which (at times) have been in excess of 50% on the year, but in my opinion, it is foolish to sell a winner like Apple solely on the basis of capital gains taxes. Likewise, I think investors of any company should question why a special dividend is considered the “best use” of capital.

Although I don’t suspect that many investors will rush to bang on CEO doors demanding to stop payments, but anyone who is objective and understands the real reason for investing should want their companies to use any excess capital to grow the business, not demand special payouts.

Apple has many rivals such as Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) clawing at its heels and doing everything possible to put the company out of business. Apple understands what is at stake. And it is not as if Apple is not monitoring the balance sheets of these rivals.

There’s More Security by Preserving Capital

For instance, Google has $44 billion in cash and pays no dividends. Although Microsoft has $66 billion on its books, the software giant does pay a decent yield. Apple’s cash balance stands at $30 billion – 30% and 55% less than Google and Microsoft, respectively.

What this means is that at any moment, either rival has enough liquidity to make any move that can disrupt Apple’s momentum. Case in point, Google is rumored to be interested in a Pandora acquisition. With Pandora’s current market cap of $1.35 billion, Google can do this deal 32 times over. This can be in immediate response to Apple’s desire to enter the music streaming business.

Likewise, it is also rumored that Microsoft is in the midst of developing its own music service platform. But for “Mr. Softy” it’s more than just that. It’s about what its cash position allows it to do. Because, aside from Microsoft’s current partnership with Nokia, which is now in a patent battle with Research in Motion  (NASDAQ: BBRY), what is to stop Microsoft from making a bid for RIM, whose market cap stands at a paltry $6.2 billion.

Essentially, with Microsoft’s current cash position, the company can make this deal for RIM 10 times. For Microsoft, the end result would be that it now has three phone platforms to use to launch an assault at both Apple and Google. Although it is unlikely that Microsoft would make this deal, it’s about security and mobility, both of which are provided by excess capital.

Bottom Line

If Apple were to give in and pay these dividends, or give in to demands each time investors have their hands out, the company would no longer be able to operate its business. Investors that want to sacrifice long term benefits for short term gratification should really think this over. This practice never works.

While I’m willing to applaud companies such as Disney and Walmart that have come out and paid these special dividends, I also think that there are several that might get themselves into trouble for having done so. At the same time, I blame the government for having created this mess. But I don’t believe that a special dividend payment is the only answer for excess capital – especially not for Apple.


rsaintvilus is long AAPL and has no positions in the other stocks mentioned above. The Motley Fool owns shares of Apple, Google, Microsoft, and Oracle. Motley Fool newsletter services recommend Apple, Google, and Microsoft. 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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