Apple's Dividend and Its Future Opportunities
It's becoming clearer and clearer over time that for an outlet to have proper coverage of Apple as a company, it must assign someone to focus almost if not entirely exclusively on the firm. Apple has become an edge case where normal analytical rules either don't apply or require detailed knowledge to be applied properly.
For instance, consider this article about Apple's newly-announced dividend and stock buy-back program that was the biggest headline on Yahoo! Finance today. The main analysis comes from a "senior stock analyst" from Morningstar named Michael Holt. He's merely quoted as noting that Apple's cash (and cash equivalents) hoard had gotten to the "definitely excessive" figure of $100 billion and that the company needed to do something about that. A question I would ask is this: if $100 billion is excessive, what is $122 billion?
Apple added $38 billion in cash during calendar year 2011, including $16 billion in 2011's holiday quarter alone. The dividend and stock buy-back program will cost the company roughly $13.21 billion per year. If Apple's cash growth continues at 2011's pace, and it'll likely speed up as the company's sales continue to grow, Apple will finish 2012 with about $122 billion in cash. It had about $97.6 billion at the end of 2011, and adding another $38 billion minus the dividend and buy-back costs gets you to around $122 billion. Holt acts as though this new program solves the "problem" of having too much cash. Instead, it only slows the rate of cash growth. Apple's so-called war chest will just keep growing.
Or, consider this howler also from Yahoo! Finance. It's by a staff writer named Matt Nesto, and he promises five suggestions for how Apple could have better used its cash (though he only actually gives four). Never mind the merits of those ideas, which are opinions and are fine for him to have. He expresses anger at Apple for agreeing to part with 20% of its cash pile in an entirely conventional manner. He makes the same problem of ignoring the rate of cash growth. Apple isn't going to be giving up 20% of its cash; it's going to be parting with roughly one third of its annual cash growth based on 2011's figure. That percentage will fall with each subsequent year of course as sales continue to rise.
Apple already spends a lot of money each year. Its quarterly report divulges that its fiscal 2012 1Q (ended December 31, 2011) included a 32% year-over-year increase in R&D spending to $758 million for that quarter alone, and its spending on Selling, General & Administrative Expense rose $709 million year-over-year to $2.6 billion in the quarter largely due to opening new retail stores. It spent another $1.4 billion on property, plant and equipment. Among that spending is the solar farm for its recently completed North Carolina data center, which will soon be joined by another data center in Oregon and its upcoming new "spaceship" campus. It's also well known that the company pays big money up front for supplies of integral components like flash memory and high-quality displays.
Apple is already using its cash effectively, and it will keep accumulating more as long as its products keep selling at heavy profit margins. So what could possibly be next?
That question is one that Wired's Jon Phillips asks in his third generation iPad review. He wants to know what precisely Apple can do to improve on the iPad concept now that it has put a Retina display in it. I think this is a very poor approach. The iPad will not change much cosmetically because there's only so many ways you can do "just a big ol' touchscreen", but that doesn't matter too much. The iMac exterior hasn't changed except in materials since the iMac G5 introduction in 2004. The MacBook Pro has barely changed since the switch to unibody construction in 2008, and the MacBook Air is roughly the same as it was externally when introduced the very same year. The lack of external changes with both the iPhone 3GS and 4S versus the 3G and 4 did nothing to slow that product's growth.
We'll see if the long-rumored Apple television set comes out, but an area of differentiation with massive potential is one that the average stock analyst knows nothing about. It's one that Apple has been working on since the release of Snow Leopard: parallel computing.
Grand Central Dispatch is Apple's foray into helping developers make their applications better for multi-core environments. It doesn't solve the hard problems for you, but once you have solved the hard problems, it makes it easy to implement the solutions. If Apple can get all of its third party developers using GCD, and continue developing it to make it more and more friendly to those developers, then it will be a huge advantage for the OS X and iOS platforms. It's no big deal that the third-gen iPad doesn't have a quad-core CPU because most applications aren't multithreaded. However, it's been obvious for years that the future is more about a proliferation of cores than gigahertz increases. Having a truly developer-friendly and widely-used multithreading solution for best using that ever expanding number of cores would be a tremendous competitive advantage.
Beyond that, it's not hard to see where other growth areas are. Apple is only scratching the surface of what it can do with iCloud, which is understandable given that it only went live six months ago. Apple is modernizing under-the-hood aspects of Objective-C, but it's nowhere near finished there. At some point HFS+ will need to be replaced, and its successor could enable better and more efficient methods for backup and file versioning (to say nothing about data security). All of that has to do with software, and it's far more important than the cosmetic aspects of what has to be affixed behind a touchscreen to make a functioning device.
For as much room to grow in market share as Apple has, and Tim Cook likes to point out that it's quite a lot every time he gets a chance, it has plenty of room to grow technologically as well. We're nowhere near an end-of-history moment when it comes to personal computing, and everyone, not just Apple, has tremendous opportunities for improvement. The only way to come to the conclusion that Apple is out of ideas or is somehow done with big innovations is to know almost nothing about where the company is at.
This dividend and stock buy-back program is not a sign that the company is transitioning out of a high growth phase. It means that the company is executing at such a high level that it can part with an extra $13 billion a year and still stockpile over $20 billion a year in cash. As long as Apple's senior management isn't resting on the laurels of its current product line, and it doesn't appear to be in the post-Jobs era, then there's no reason to think that returning some of its cash to shareholders has any deeper meaning than its mere face value.