Apple: Plenty Of Cash, Not Enough Innovation

I didn’t initially have much to say about Apple’s decision to pay a quarterly dividend of $2.65 per share while also buying back up to $10 billion worth of stock over the next few years. Apple does what it does, and they keep making money, but this move really points towards a more obvious problem that should scare some Apple investors.

When talking about Apple’s decisions with my boss and our firm’s lawyer they immediately brought up what I had initially thought was my sick-of-Apple bias. They both mentioned how studies have shown that share buybacks are typically a negative catalyst for stock prices in the long run. This, paired with the fact that with all of Apple’s cash, they weren’t able to come up with a way to innovate, keep growing, or use it better than to just give it back to shareholders.

This new ideology paired with the now complacent “New iPad” and not “iPad 3″ naming shows their general slow down of major innovation. I have huge hopes for the iPhone 5, but for the first time ever, I actually believe that Apple has out-innovated itself, and really has lost all of their vision without Steve Jobs at the helm.

I’m not going to say that Apple is going to start losing money, or that they are in any sort of immediate trouble. They have built such a cult following that it almost doesn’t matter at this point what they come out with, everybody in the world will want it, and pay more than all of the product’s competitors charge for it. There was a great article written on ZeroHedge about this dilemma, but I thought I could add my two cents. Apple isn’t in trouble yet, but I hope Tim Cook and Company are aware that when they became successful “Thinking Differently” 10,000 entrepreneurs around the world started trying to think even more differently, and 11 years after the first iPod, one of them could be getting ready to do to Apple, what they did to the likes of Xerox and maybe even Microsoft.

Apple and Income Inequality in the U.S.

Apple stock price rallied to $602.50 on March 21 partly due to the the company’s decision to spread some of its huge pile of cash ($97.6 billion in cash equivalent with no outstanding debt at the end of 2011) in the form of dividend and a share buyback program.

Apple said it will pay a quarterly dividend of $2.65 per share, starting July 1, and plans to buy back up to $10 billion in stock over three years starting Sept. 30.  Apple is not the only one hoarding cash.  According to Moody’s, U.S. corporations, including Apple, has amassed a record $1.24 trillion of cash last year post 2008 credit crisis.

Apple has been under pressure to reward shareholders as Apple’s iProducts sales keeps feeding its cash mountain.  So we most likely will see other large corporations follow suit declaring dividends and initiating share buyback programs in the coming quarters.

However, the more disconcerting question is this:

Given that Apple is the leader in technology innovation and creativity, are these two options (dividend and share buybacks) the best Apple can come up with to put its cash to good use?

After all, Apple shareholders have been rewarded very handsomely as Apple stock soared from a $5+ stock in 2006 to today’s $600+ level.  Apple stock went up 75% in the past 52 weeks alone.  Do Apple stockholders really need more cash reward from Apple?

Would Apple not better off re-investing its cash in innovative technology and product R&D, and niche acquisitions? Better yet, how about giving some cash back directly to the employees at Foxconn–Apple’s iSweatshop–or Apple’s own mid to low levels employees  (i.e. non-executive and non-managerial ranks) to boost morale and  productivity?  After all, Apple owe a large part of its’ enviable iSales and iMargins to the hardworking worker bees at Foxconn and Apple.  (Yes, we know U.S. corporations are paying wages at the “fair market rate” in oversea shops, but a little cash sprinkle now could go a long way.)

The chart below from Council on Foreign Relations (CFR) illustrates how labor’s share of income in the United States has plummeted while personal dividend income as a percentage of disposable income has soared since 2009.

Labor and Dividend Income


In fact, CFR noted that dividend income along with corporate profits took the biggest jump in the early 1980s, a time in which labor’s share of income has fallen almost continuously.  Needless to say, fiscal, legal, and monetary policies enacted by the U.S. government and the Federal Reserve had a big hand in this divergence, as well as growing income inequality in the U.S.

How big is the income inequality in the U.S. relative to the rest of the world? Here are some statistics from the Standard Center of Poverty and Inequality:

“The U.S. ranks third among all the advanced economies in the amount of income inequality. The top 1% of Americans control nearly a quarter of all the country’s income, the highest share controlled by the top 1% since 1928.”

Perhaps it is time for corporations to rethink more meaningful and long-term strategic use of their cash, instead of driving income gap ever wider to appease the 1%.

Source : ZeroHedge