With dividend, Tim Cook thinks differently about Apple

While playing the “Steve would never do that” game is seldom a great idea — it’s akin to calling yourself a fortune teller or a mind reader — it is fairly safe to say, based on his prior statements and declarations, that Steve Jobs chose a successor who is not afraid to do things differently than he would at Apple (s AAPL). After years as the company’s COO, Cook has been Apple’s chief executive officially since August, and in that short time he’s done a number of things that represent a different direction for Apple as a company and its culture — instituting a generous charitable contribution matching program, engaging more with investors and publishing detailed audits of its international manufacturing plants, to name a few.
On Monday, he made his mark on the company in a bold new way when he announced Apple will begin a dividend payment for shareholders of $2.65 per share starting in July. Apple will also spend $10 billion to repurchase shares of its stock over the next three years. Both of these things were done to answer the prickly question of what Apple would do with its giant pile of cash — which at $98 billion as of December is sure to grow even larger after this quarter’s launch of the new iPad.

Charting his own path

Cook answered this question by breaking with his predecessor. To understand how Cook thinks and how he differs from Jobs, we need only look at what Jobs has said in the past on this very topic. At a shareholder meeting in February 2010, when asked about a dividend Jobs very clearly laid out his opposition to one and why he feared not having access to cash:

“Cash gives us tremendous security and flexibility. When you take risks, it’s like jumping up in the air, and it’s nice to know the ground will be there when you land,” he told the group. “We run our company conservatively from a financial point of view because you never know what opportunity is around the corner…We’re very fortunate that if we needed to acquire something we could write a check for it and not have to borrow money.”
Jobs also rejected the idea of giving stockowners more of that cash through dividends because, he said, he believed the stock price, currently at $201.60 a share, would be unaffected either way. He asked one shareholder, “Would you rather be a company with our same stock price and $40 billion in cash, or a company with the same stock price and no cash?”

The conservatism stems from Jobs’ fear of putting Apple in the situation he found it in when he returned in 1997: a few weeks from bankruptcy. But what he also intimated in that explanation is that beyond fear of going into debt, he wanted the flexibility to acquire companies, or to make gigantic pre-payments of touchscreen displays or flash memory: risks that Apple likes to take to ensure its ability to meet demand and simultaneously squeeze out competition in the supply chain.
Of course, that’s when Jobs was looking at $40 billion and a stock price of $200. Who’s to say that Jobs wouldn’t have entertained a dividend seriously when seeing the data that Cook is looking at: cash of almost $100 billion, stock hovering around $600, and a company that is the largest in the world, valued at $555 billion? Jobs was famous for his forceful opinions that sometimes conflicted with reality, but, as his biography pointed out, he could also be quick to change his mind (see video iPods, the iBookstore, the iPad, etc).
Jobs was known for his extremes, but Cook and his CFO Peter Oppenheimer found a middle road: a way to satisfy Wall Street’s criticism of its too-large cash hoard, but in a manner that allows the company to stay flexible. After the dividend and share repurchase Apple will still have around $50 billion in cash in 2015 — in addition to, as Horace Dediu as Asymco points out, whatever it continues to add to its cash reserves over the next few years — and Microsoft(s MSFT), for example, has around $50 billion in cash and they don’t worry about having cash.
Notably, the $2.65 per share dividend rate Cook and Oppenheimer selected amounts to a 1.81 percent yield at the current stock price. And as The Wall Street Journal points out, that isn’t that high even among its tech company peers: AT&T’s(s T) dividend yield is the highest at 5.61 percent, followed by Verizon(s VZW) at 5.09 percent and Microsoft at 2.42 percent. Even lower than Apple is Cisco(s CSCO) with 1.6 percent, IBM(s IBM) with 1.51, Oracle(s ORCL) with 0.81 percent and Google(s GOOG), who has never issued a dividend.

A dividend doesn’t mean it’s done growing

So does this mean Cook is being careless or bearish on Apple’s future growth prospects? It would seem not.
At the beginning of the conference call with Apple investors and the media Monday morning, before even uttering the word “dividend,” Cook took pains to explain the growth opportunities he sees for Apple, and stressed how confident he is in the company’s future. As he did during a recent investor’s conference, Cook reiterated that despite selling 37 million iPhones between October and December, that total made up just 9 percent of all handsets sold in the world. The number of handsets “is expected to grow to 2 billion in 2015,” he said. “The potential for iPhone is enormous.”
He repeated something similar about the iPad, about how it will eventually surpass the PC market in size. HE talked about how the Mac, despite holding a 6 percent share of the PC market, continues to grow at a higher rate than the entire PC market. He reminded investors that Apple is opening 40 new stores in 2012.
The subtext? We’re not a company that’s done growing, and we’re not out of ideas, two of the most common worries about Apple in the post-Jobs era. A lot of times issuing a dividend signals that a company’s investment opportunities are better than its prospects for growth. Apple is very clearly not saying that. It’s saying that it had to do something with its cash, and Cook made the call on what to do.
His decision is different than what we might think Jobs would have done, but Cook also assured that this move to spend $45 billion is not a complete break with the established Apple way. On Monday he said that even with the share repurchase and dividend, the company still has plenty of cash, which they will use on the same things they always have: research and development, opening new stores, strategic expenditures in the supply chain and making acquisitions. “There will be more of all of this in the future,” Cook reiterated. “These decisions will not close any doors for us.”