Apple has scheduled an unusual (and oddly timed) conference call this morning to announce its decision about what to do with its massive cash mountain.
There are three basic possibilities:
- Dividend (either one-time or regular or combination of both)
- Stock buyback (one-time, regular, or combo)
Apple could also obviously use the cash to keep making acquisitions, but it already makes those, and it’s unlikely that the company would schedule a conference call to announce that it will make more of them.
A dividend is the obvious call, but it’s actually the least-efficient for shareholders. Thanks to U.S. tax policy, Apple shareholders who aren’t pension funds will have to pay taxes on their dividends, so paying a dividend will result in a boatload of Apple’s cash being handed over to the government.
(This doesn’t mean Apple won’t pay a dividend–lots of companies do. It just means that U.S. tax policy makes this an inefficient use of cash.)
The more-efficient play, but one that comes with its own pitfalls, is to buy back significant chunks of stock. Unlike paying a dividend, this “returns cash to shareholders” (by shrinking the share count), but does so without forcing shareholders to pay U.S. taxes. One reason dividend payouts have been lower in the past few decades than they were in the first half of the 20th Century is that companies have chosen to go the more tax-efficient route, buying back stock instead of paying dividends.
The drawback with buying back stock is that companies generally have a spectacularly bad sense of timing. Specifically, they tend to buy their stock when it is expensive, only to watch it later crash. This destroys shareholder value rather than creates it, and it’s a good reason to avoid doing it.
Lastly, Apple could do nothing.
So, what will Apple do?
We’ll find out at 9AM ET.
Most folks think that Apple will announce some sort of dividend, and that’s certainly possible. One ludicrous element of U.S. tax rules will apparently make it impossible for Apple to use the cash it has stashed outside the U.S. to pay a dividend (without getting socked with penalties for “repatriating” the cash), so this would limit the amount Apple could pay. This tax rule seems particularly absurd–Apple’s stock is held all over the world–but it is what it is.
Last night and this morning, the smarter folks seemed to think Apple would do nothing–and use the call to bash the government’s tax policies.
Government-bashing seems unlikely (at least to me). A clear explanation of why the company isn’t paying a dividend would accomplish the same purpose with agitating the powers-that-be. But “do nothing” seems possible.
I’ll bet the company also authorizes–but does not commit to–a stock buyback. Like most other companies’, Apple’s stock occasionally wilts, and there’s no reason not to have the authority to buy back a few tens of billions of dollars of it at what appear to be cheap prices. This costs the company nothing, and it would provide psychological “support” under the stock price.
None of this, meanwhile, explains why Apple is holding the call at 9AM on a Monday morning, which is a very unusual time for a call like this. The theory has been floated that sales of the new iPad were weak and that this call is intended to provide some sort of cover, but that also seems ludicrous (and un-Apple-like).
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