This past Sunday, Apple abruptly scheduled a Monday morning conference call “to announce the outcome of the Company’s discussions concerning its cash balance.” The call, followed by a press release, announced two initiatives: a $2.65 per share quarterly dividend and a $10 billion stock buyback. Macworld has a full transcript of the call; audio from Apple is here.
The announcement itself was intriguing. Why a conference call? What’s wrong with the press release? (I asked this on Twitter regarding both dividends and buybacks.) When Apple stands up to talk, people expect something big. Anything less is bound to disappoint someone. I can’t imagine investors receiving this news differently in print versus audio form. It felt like a departure from Apple’s typical controlled communication style. Maybe Tim Cook just likes talking to investors.
Cook and Peter Oppenheimer repeatedly cited “dilution from our employee equity program” as the reason for a buyback, and it’s a good reason. Stock compensation remains instrumental to attracting and retaining talent, and Apple needs to keep that incentive strong. Horace Dediu has a nice breakdown on the buyback numbers.
People love to talk about Apple “taking itself private” as the cash pile grows. Steve Jobs famously loathed shareholder meetings, so it’s fun to think about. But it makes no sense. If Apple bought itself out, it would have no free shares to reward employees with, and no cash left to replace those shares with bonuses.
At face value, I don’t get it. Just look at this chart. If you’ve consistently sworn off Apple shares just for lack of a dividend, I question your sanity. If you have Apple shares, and are still holding your hand out in the face of these stratospheric gains, your hubris is breathtaking. Apple has always acted in its own interests, and spent money in places that it believed would yield benefits for the business. A dividend does not do that. How can they just start throwing away billions of dollars a year?
One thing a dividend does is encourage long-term investment, which could help stabilize the stock price. It’s bound to slow down sooner or later. The question is, when will that happen, and how dramatically? Perhaps Apple is attempting to impact that part of its destiny as it does any other. Reducing heavy speculation on the stock could cut down on future dramatic corrections, which would be good for Apple’s “real” investors — especially its employees, whose compensation is tied to the stock.
Apple grants restricted stock units (RSUs) to employees. These are shares at market value, as opposed to options, which have a strike price. With options, the stock needs to grow above the strike price before the employee makes any money. By contrast, the employee can sell RSUs at any price and get all the money. The use of RSUs makes growth nearly irrelevant to employee compensation.
At this stage, then, management is incentivized to prevent the stock from crashing rather than keep it climbing; to keep those shares, which Apple is about to spend a lot of money buying back, stable. Viewed in this light, and alongside the buyback, a dividend does invest in the business and its employees, while also pleasing the open mic comedians who descend on Town Hall every February. It also feels more like Apple-style thinking, which is to say not your average executive team that mortgages everything just to make the stock go up.
Apple said Monday’s news was all about cash, but it was really about stock. It highlights the company’s shift from an underdog-turned-juggernaut, to the world’s biggest company securing its position as the world’s biggest company.