Are Apple Payouts Worrisome?

MJG

Hi Guys,

Am I misreading the tealeaves when I worry about Apple’s decision to return its huge accumulated cash reserves to investors by way of dividends and with the initiation of a stock buyback policy?

I interpret Apple’s decision as an early canary warning from the economic mineshaft. I seek your opinion on this matter.

A cutting edge and innovative company like Apple only defaults to these actions when they can not identify investment opportunities with projected returns on capital that equals or exceeds their current product lines. That’s a danger signal relative to productivity growth. Outfits like Apple have been the engines for economic growth and creative destruction for decades. Is this an early sign that productivity growth is slowing down?

If it is, that’s not a good signal for the United States; dampened GDP growth rate is quickly reflected into muted corporate profits and unattractive equity returns.

Here is a Link to the WSJ article that discusses the Apple policy revision:

http://online.wsj.com/article/SB10001424052702304724404577291071289857802.html?KEYWORDS=Apple+Pads+Investor+Wallets

This is certainly no longer the Apple of Steve Jobs who innovatively identified and sponsored products that leveraged emerging techno-science know-how.

GDP growth rate is dependent basically on the sum on two primary factors: demographic and productivity annual rates of change. History serves as a reliable guide to assess these controlling parameters. As Winston Churchill observed: “The further backward you look, the further forward you can see.”

For economists, demographic trends are the easiest to predict. Currently, in the US, our demographic growth rate is about 1 % per year. For many developed-country economies that rate is below zero and foretells future problems, especially when factoring in the aging character of their populations. Developing national economies feature the reverse problem that is promulgated by exploding demographics.

Productivity is a horse of a different color since it depends upon uneven scientific discoveries, and the techno-science integration of those wonderful discoveries into the economy. Science opens the door, but society writ large decides if and when to enter the doorway. That decision is crucial and is not singularly economically governed.

Historically, according to Alan Greenspan from his “The Age of Turbulence” book, our productivity growth rate has averaged at the 2.2 % level since the late 19th century. That’s a boatload of data. Obviously, it does vary annually, but the accumulated data demonstrates that productivity is stable over timeframes like 10 to 15 years. History shows that it is difficult for a developed economy like the United States to maintain a productivity growth rate of over 3 % for a sustained period.

So, is Apple’s Action a harbinger of muted capital investment spending on a global scale? Forecasting is mostly impossible, but time will crystallize the macroeconomic investment trajectory. The good news is that this uncertainly will largely be resolved in roughly a six month timeframe for the US.

What is certain is the highly connected character of our complex world institutions and agencies (financial/political/economic). A lower overarching capital investment policy equates to a lower national (maybe global given the international structure of successful businesses) savings rate, which rapidly translates into lower productivity gains. In turn, dampened productivity curbs annual GDP and GDP per person growth rates. Lesser GDP growth quickly morphs into below normal corporate profits. In the end our national happiness quotient is sadly truncated.

Of course this is not a predestined scenario. This tangle of entities are all interconnected in a seemingly enigmatic manner, but, in reality, they have proven to be tightly and positively correlated. We need more capital investments which implies that we need to save more. Capitalism works. Since capitalism and democracy are twin sisters, to somewhat distort Sir Winston Churchill: Capitalism (Democracy) is the worst form of economics (government) except for all those other forms that have been tried from time to time. All those others have failed.

Time will expose the pathway through our current conundrum.

Your comments are encouraged.

Best Regards.

NickF

Apple's growth will probably slow down at some point, but you're looking too much into this.

scott

In my opinion, Apple is really an "everyone on one side of the boat" situation. You have a company that is about as large in terms of market cap as the entire retail sector. That's not to say that it can't go further, but there's going to be a mistake that can't be quieted or spun, like the antenna issue on the Iphone and the overheating issue of the new Ipad. Beyond that, I do think that the idea of starting to return money to shareholders may be some sign of a lack of opportunities, so I do agree with MJG to some degree there. Additionally, as I noted in another thread, there are some very serious issues in this country that I sort of wish would be more of a focus in this society. Issues like water supply, energy, obesity (as for sitting around and watching TV, there's a new app called Viggle that rewards you for every TV program you watch), food supply and more. You turn on CNBC and all I hear about is what Apple is doing - we kinda need to be about more than an "iSociety."

This was the article that I mentioned in the other thread regarding China:
http://www.bloomberg.com/news/2012-03-19/blood-cleaning-burden-shows-china-s-struggle-with-health-costs.html

As for Apple, I'm sort of surprised they didn't do something like buy Electronic Arts or another game manufacturer to try and create their own Microsoft/Bungie (although nothing is like Bungie.) Apple applying their innovation to medical displays (crazy idea, but maybe some sort of industrial Ipad that could be built from the ground up with the medical field in mind? Just thinking out loud.)

I wouldn't call Apple's action an early warning on economic activity as a whole, but it is rather curious that they aren't using the money to buy anything. Meanwhile, I own another company (Glencore) that seems as if it's buying something every other week.

Investor

MJG, this is not a normal situation. Apple is sitting on a huge cash hoard that is more than needed. So, they are returning to the investors a portion of it. Still, the remaining cash is more than enough.

Sven

Reply to @scott: "it is rather curious that they aren't using the money to buy anything"

Recent new Apple business including iTune, smartphone (iPhone), and tablet (iPad) are developed internally rather than through acquisition. And each are uniquely market leader before other copycats come along. That alone set them apart from the rest of pack.

Now that Apple is a dividend paying stock and traded at a very reasonably price with solid earning. Many dividend or value oriented mutual funds will be interested. Along with stock buyback in the future, the stock price will likely continue to climb. Wish I bought a few more share awhile back...