March 28, 2013
Analysts expect a big dividend hike before Apple’s April 2013 earnings report, pushing the yield to around 3.5%, in line with Microsoft at 3.3% and Intel at 4.1%. This would send exactly the wrong message to investors, and would guarantee that Apple would not regain its September 2012 $700 value anytime soon.
Why? It’s a matter of perception. Think back to your high school days. Apple, once up over 600% from its 2009 lows, has been sitting at the cool kids’ table in the cafeteria, right there with the jocks and cheerleaders, with all the outperformers like Amazon (+374%), Biogen (+264%), Celgene (+176%) and Google (+150%). Its strong revenue and earnings growth briefly made it the largest stock in the U.S. by market cap, temporarily dethroning Exxon. But now, because of its slowing growth and lack of a hot new product, Apple no longer fits with the cool kids. It’s like the disgraced forward who choked on the tie-breaking three pointer hurled up from midcourt. With its stock down 35% in six months, Apple is now standing at the cafeteria door, lunch tray in hand, trying to figure out where it fits in.
A big dividend hike would signal that Apple’s cool kid days are over. That it belongs at the value stock table with Microsoft and Intel, both of which have underperformed the S&P 500 and the technology sector over the past three years. That its jaw-dropping performance is a thing of the past. That we are unlikely to see a “nothing but net” new product coming out of nowhere to save the game.
To keep its spot with the cool kids, Apple needs to channel its cash into research and development or accretive acquisitions, into churning out more of those amazing products that we never knew we needed but quickly realized we could not live without. A big dividend hike commits AAPL to siphoning its cash away from big ideas and big opportunities. It signals that AAPL’s momentum days are over, and that longer term it is content to sit at the high-dividend, lower-growth value table.