Morgan Stanley recommends Apple use cash for share buybacks, dividends - Page 3

Wrong. Dividends are issues by companies who want to attract investors who are looking for income.


Wrong. Companies buy back their own stock when it's undervalued. And Apple's stock is currently undervalued because it's getting hit by the same factors (possible Greece default, etc.) that is bringing down the entire market.


It's not the worst thing they can do. If they want to buy something big instead or develop a new technology, fine.

The overall point is that Apple may not be doing a great job of managing their cash.

Mostly correct. However, buying back shares at $375 doesn't require that it be a guaranteed great investment. All investments involve risk - whether acquiring a company or buying shares in a company. There's also a risk (mostly opportunity cost) to leaving their money in cash.

Buying back shares at $375 would be a good deal if the expectation value of that purchase is greater than the expectation value of whatever else they would consider doing with the money. It doesn't have to be a sure thing for it to make sense.

If you really want/need cash from owning AAPL, you can write options.

Exactly.

If John B. learnt differently in his MBA finance course, I am begnning to rethink his.....

Correct. And, if the market believes management, the signaling effect on the stock price is likely to be reliably positive ("They are credible folks, and they seem to be not only saying they are more optimistic about the company's future cash flows than the market gives them credit for, but they are putting their money where their mouth is").

A secondary benefit - assuming the expectation pans out, and the repurchased shares are kept as treasury stock - is that employee option exercises will result in less shareholder dilution.

I am sick and tired of analysts telling Apple what to do with it's money. Apple has no incentive to issue a dividend. If you want a dividend then buy stock in one of the companies that do. Apple imo is a company to invest in for growth. Apple is a company with no debt whatsoever. Apple's made its money selling products.

Morgan Stanley is a company of idiots who had to be bought out. Why should anyone listen to a bunch of idiots who caused their own company to go belly up?! BOA might have bought them but now BOA is laying off 30,000 people. So lets see whose better Apple or Morgan Stanley? Apple of course. Let use not forgot that Apple's stock price is nothing more than what people think it would cost to buy it.

It is any kind of finance wisdom. It is common knowledge. I for one choose not to mock something if I don't understand what it means. But you're welcome to make a fool of yourself.

Precisely. Those who don't like the stock without dividends, don't buy it.

Stock buyback is unquestionably a gimmick. It reduces the number of shares and thereby artificially increases the profit per share, leading to a higher share price. Why would a company do this if it is performing well?

Teeny weeny fragment of a great post ...

Thanks, I really enjoyed your post. Informative and very amusingly written.

p.s. I got my MBA from Harvard!


... at the Apple Store in Cambridge.

Wrong. Apple is absolutely awesome at managing their cash.

A company's Return on Invested Capital is the ultimate measure of a company's valuation. Basically, ROIC is a measure of how efficient a company is in using its capital to generate returns.

Let's compare Apple and Google's ROIC. Apple's return on invested capital is 30.4% with 5 year average of 26.1% despite Apple having lower gross profit margins compared to Google. a 30.4% ROIC is amazingly high for a "hardware company". Google's return on invested capital is only 18.3% with 5 year aveage of 17.2%. Why?

Different types of growth earn different degrees of return so not all growth is equally value-creating. Growth strategies based on organic new product development (ie. iPod, iPhone, iPad, iMac, etc.) frequently have the highest returns because they dont require much new capital. Apple can add new products to their existing factory lines and distribution systems, without much capital expenditure. The investments to produce new products are not all required at once. If preliminary results are not promising, future investments can be scaled back or canceled.

Contrast this with Google's growth strategy of acquiring companies (Motorola, Youtube, Android, Doubleclick, etc.). Acquisitions require that the entire investment be made up front. The amount of up-front payment reflects the expected cash flows from the target company plus a premium to stave off other bidders. So even if Google can improve the target company enough to generate an attractive ROIC, the rate of return is typically only a small amount higher than its cost of capital. Factor in the additional traffic acquisition costs and costs of running hundreds of thousands of servers to support Google search, Youtube, Blogspot, GMail, etc. and you'll see why Google's return on invested capital is much lower compared to Apple.

Google also has a habit of wasting money on money-losing initiatives with low ROIC (Google's $280-million solar power initiative, self driving cars, etc.) which further dilutes its average returns. Wall Street perceives the $12.5 Billion Moto acquisition as an expensive and inefficient use of capital that will further dilute the company's ROIC.The recent $500 million settlement with the DOJ is another concern.

and that is why Apple is the most valuable company in the world. Meanwhile, Google's market cap has been stucked in the $170-$200B range for a couple of years or so.

Here's the number one rule of conservation of value: "anything that doesn't increase cash flows doesn't create value".

No. They don't have your money. They control the perception of the piece of paper that someone holds on your behalf in some far away place. When you wish to sell your piece of paper, you get the money from someone else in the future. This is the stock market, go look it up.

I think you meant to say that Apple would be stupid to buy Morgan Stanley and that the action would reflect badly on the stock price, but what you said was completely inaccurate and misleading.

I can guarantee you that well over half the things in your home right now are not made in the US.
I would love to see manufacturing come back to the states and stay but as long as there is cheaper labor out there....It's not going to happen.

Gee, then there should be a buying frenzy across the world!!! BUY BUY BUY!!!! Yours is the dumbest logic I have heard. If apple is down, it is because the world will not have disposable cash if Greece implodes. Apple isn't immune to the world markets and is not undervalued just because of Greece. Others, probably - but not just Greece.

It looks like he didn't get his money's worth from that Princeton education after all.

I wouldn't discourage anybody other than AAPL.
Buying back shares will only be good for shareholder value if the shares are dramatically undervalued.

If I buy more shares, I can sell them later. If AAPL buys the shares, they retire them. They can't be resold later on at a profit.

That's what voting rights are for. Not every shareholder is happy to just let management do as they please from the moment they bought the shares (and I believe the widespread lack of interest by shareholders in holding senior management accoutable is ultimately very damaging to the economy).

Few investors fully agree with everything a company is doing, but a disagreement is not sufficient reason to sell shares. Would you sell if you thought a good management team could do even better?

I guess the field is not the place to look. The good ol' USA has the second largest manufacturing economy on the PLANET. And if China weren't manipulating their currency we would be #1.

Why is that, you ask? Because we are the best, sucker!

Have some pride and seek the truth, OK? Don't talk down our nation and our people.

I wonder if people like you are actually posting from somewhere in China, trying to discourage the American people. Are you an employee of Red China, perchance?

USA, USA, USA!!!!!

After listening to his 'Critical Path' podcast, I've become convinced that Horace Dediu is the only analyst out there that understands Apple enough to talk about them without sounding like an idiot. He seems to understand what makes Apple function in ways that other large companies can't operate, and he makes other analysts' assessment of Apple sound like they are talking about completely different companies.

But that's just my opinion...

As per usual, a lot of people don't seem to get the basics of capitalism. The purpose of capital is to invest it in growing the company's business. The basic assumption is that profits are most efficiently used this way, if you can also assume that the company is good at what it does. If the amount of accumulated capital exceeds the ability of the company to reinvest it in growth, then some other purpose for it should be found by a responsible board of directors. The usual method is via a dividend to the stockholders. While this often occurs when companies have hit a growth wall, in Apple's case it's happening because they are growing too rapidly to spend all the money they make. The bottom line is, Apple is not doing the stockholders any favors by sequestering so much cash. It is no crime for stockholders to want their value maximized. Cash contributes nothing to shareholder value unless it can be responsibly invested in future earnings growth or it is paid out to the shareholders. Apple has shown no signs of doing the former, so they should instead do the latter.

Apple's cash hoard would be better spent on major acquisitions or major product development.

If investors are not satisfied with AAPL despite explosive growth in stock price over the years, then they can perhaps buy GOOG (LOW ROIC) or MSFT (stagnant share price, pays dividend).

GO AHEAD I DARE YOU SELL AAPL!

I would love for the US to be #1 again at manufacturing. I would love to see the US prosper. I would love to see all of my friends and family, who lost their manufacturing jobs and are now unemployed, find jobs. But I am also a realist and am not blind to what is going on in this world. You can't blame China for our government trade policies. You can't blame other countries for our big business' sending work their way. I'm not saying that it is right or that I like it. It's just the way it is right now.

You seem to be trying to counter perceptions with mere reality. That never works.

What works is the loudest, biggest guy in the group saying "we don't make nothing here no more!".

Trust me, that is much more effective than statistics.

The same thing has happened many times over the course of history. There were huge dislocations at the time of the agrarian revolution, when people settled down into villages with a division of labor, rather than being nomadic hunter/gatherers. Suddenly, with enough to eat, people needed to learn how to do more than be a spear-chucker.

More recently, we saw an industrial revolution. It used to be that pretty much everybody was living on as farm and growing food. The tractor kind of changed that. Huge dislocations occurred as people couldn't get work manning a hoe anymore.

Even in the non-agricultural sector, artisans were replaced with machines. Pre-made standard parts allowed semi-skilled labor to replace guilds. Hand-carved furniture was replaced with machine-made.

The changes were wrenching. Mike Mulligan and his steam shovel could replace 100 men with 100 picks and shovels.

Now we are seeing similar changes. Robotics are revolutionizing manufacturing.

People in post-industrial economies need new skills. Many will fall through the cracks. Twas ever thus.

Well said

And you think that following standard Wall Street paradigms aren't responsible for the stagnation of, for example, Microsoft's share price? Yes, there are defined business models that are used over and over by companies with average to below-average market performance numbers. That said, what about Apple since the iPod was introduced seems to be "usual" to you, that the "usual methods" would apply? Instead, they are managing their short-term assets as a strategic asset (N.B. it's not all cash) that gives them leverage and flexibility to use it where they see fit. Again, as one small example, Apple can prepay a contract for future delivery of specific types of memory or displays with a vendor to ensure supply and establish a known cost of goods, a billion dollars or more at a time, all without breaking a sweat.

Also worth pointing out, a shareholder has the right to vote for BoD elections and special shareholder proposals, or sell the stock. They don't, however, have the right to dictate how a company's day-to-day strategic operations are run.

There's a slight problem with the America as Service Economy thesis. Not everyone is an entrepreneur! People do need sustainable work, that does not require them to be multitalented geniuses. Also, a country is more secure strategically when there is some manufacturing base that is local.

Do we really expect that Joe Average is going to wake up one day and dream up a product and have it assembled in India/Brazil and marketed worldwide? True, a lot of that will and must happen, but I think we had better improve available schools before we even dream about having that kind of society.

This is very different a problem than the workforce faced when computers first came out , everyone thought they'd lose their jobs to machines-- but many learned to adapt and productivity increased. To expect people to change their innate temperaments seems like waayy too much though.

I think it's still a slavery issue in some ways. I think the Europeans have got us beat in resolving the 'greed' mentality. They set up industry expecting to pay a fair wage and taxes for the overall good of society, rather than depend on spotty charity and privatization.

Why must we have 'slaves' to make our products 'affordable' ? I don't begin to pretend to have the answer, but it is an interesting question.

Oh, I'm gonna get flamed for this post. It was intended to be philosophical.

Pardon? I don't recall making a Microsoft comparison. I'm not sure where this fits in. The point is, Apple cannot spend even a tiny fraction of their cash (liquid assets if you prefer) on growth. They couldn't do it years ago when the hoard was a quarter the size it is today so there's no reason to expect them to do so as the hoard approaches $100 billion.

Point missed, I guess since your response didn't have anything to do with what I said.

You're confusing capitalism with capital. Capitalism is a macroeconomic concept. How to run a company, including how to use its profits, is microeconomics. Nothing in the definition or study of capitalism says that "The basic assumption is that profits are most efficiently used this way" or any particular way. Capitalism is more about an economic system, and less about how an individual company operates. Sure, in a capitalist system, many companies use profits in the way you described (actually, you didn't describe it first but I'm too lazy to quote others). But that is historical practice and not a requirement or standard of capitalism. Not investing profits that way does not contradict any tenets or assumptions of capitalism. After all, if not spending cash this way goes against capitalism, are you insinuating Apple is practicing socialism or communism?

Capitalism is both the economic system and the means by which it creates wealth. Call it what you will, it hardly matters. The basic point I am making here is that a company grows its earnings by expanding the business it knows best. They way they do this is by reinvesting current profits into future growth. The fallacy often perpetuated in these discussions is that the goal of a company might be, instead, to accumulate cash, as if it was more like an individual planning for retirement. Companies don't retire unless they fail. They are more analgous to sharks. They have to constantly move forward to survive and grow. Reinvesting capital is how that is accomplished.

I won't go into the dangers of Apple's seemingly relentless cash accumulation (the lead article does a good job at that), but I would add that Apple is not an investment bank, and I don't know anyone who thinks that any substantial portion of their profits should come from investing liquid assets in securities. At the risk of belaboring the obvious, Apple is a great technology company, and their free cash is far better used advancing that business. It just so happens that Apple is so good at what they do, and the demands for capital reinvestment to keep it very well oiled are so relatively small, that they've created an immense cash machine, with no limits in sight. What they should do with the excess is an entirely reasonable question. It's going to get asked more and more as the size of the cash mountain grows.

The first sentence is spot on. But the second sentence is sadly mistaken. This is not *THE* way of expanding the business. This is ONE way. What way does Apple know best to expand its business? They are doing it and doing it rather well.


I don't see this fallacy perpetuated here. A few comments to that effect do not make for *perpetuation*.


That's misfired analogy. Again, reinvesting capital is ONE way, not *THE* way. Again, Apple is doing it a different way, which seems rather successful so far.


Ask all you want. There is no law in the US, no requirement in capitalist tenets, to use the cash to pay dividends or to repurchase stock. Furthermore, Apple does not have a history of going *with the flow*.

The fact is that 2/3 of Apple's cash is stashed outside the US. To use it in ways that some people want, they will have to bring the cash back to the US and pay taxes on it. I am sure there are ways to circumvent this, but financial gimmickry rarely has long term benefits, IMO. Now, will Apple change its stance if a tax holiday was granted? That would be interesting. Personally, I hope this does not happen.

This whole thing smells like inventing a crisis where there is none. The amazing thing about Apple right now is that it can burn the cash hoard on hand, and it won't change the enviable position that the position is in.

Who knows what Apple might do with it's cash. I can sure daydream. Maybe they will do something huge, like buy a car manufacturer and redesign bunch of carbon fiber interchangeable bodies to go on top of an all electric drive train. Buy one drive chain and pop on this years new carbon fiber sportscar body. Or mini truck. Collect them all and hang em on your garage wall The hardest part of this possibility would be the drive chain. There are others all ready with the battery-swap station infrastructure. Its not really so far out of their core competencies....

Maybe they will build their own semiconductor plant. They are probably the only company that I wouldn't be asking for a rebate from their cash hoard. Whatever they do it will be exciting to watch.

This never happened. Morgan Stanley and Bank of America are two major competitors of one another. You may be thinking of Merrill Lynch, which is still a subsidiary of Bank of America. Maybe you should keep your mouth shut, period. Before you bash on a company (for a ridiculous reason too), maybe you should just do a simple Google search to make sure what you're saying is accurate...

Couple of points. First, we'd better hope (assuming I'm talking to actual stockholders here) that Apple doesn't decided to invest hugely in industries they essentially know nothing about. That is unless you want to see your investment slaughtered. Second, Apple could easily declare a very generous dividend and still sock away ten of billions a year of additional cash. Their free cash flow is immense. The argument against a dividend is extremely vague and mainly nonsensical.

What made you respond? Do you think that crazy ideas should be stopped in here? Why do you think I'm not a shareholder?

Of course the stock will be slaughtered as soon as they dare do anything that you can't forsee a use for. Sigh. It's sad really.

It is more likely that the cash hoard is a deterrent to the telcos, at least until broadband is rolled out. Then, who knows? Somebody needs to make an efficient car, I really don't think it's too far from their core competencies, provided it's electric. Didn't Ives say he wanted to design a car next? Didn't apple talk to VW ? and, to paraphrase Tom Friedman, 'just as sure as I'm sittin here darlin, it ain't gonna be made by Exxon'

Ah, more likely they'd build a chip fab, nope, a nano chip fab, I agree with the other poster's list.

I got what I got cause I could SEE this scenario 11 years ago

Katy Huberty is the worst analyst on the planet - go look up her record on Apple calls if you don't believe me. It is absolutely amazing that she is still employed.

Analysts told Ford to turn their cash horde into dividends, and Ford later regretted not having the money laying around - luckily they sold and leased back their buildings before things went south so they did OK anyway. Apple is still sore about nearly going bankrupt, and they going through the dot com bust - the dot com bust is why most tech companies have no debt and a lot of cash, they learned their lesson.

Apple wasn't able to sue palm for infringing on the newton because they were too broke, and they had to beg Bill Gates for money. As an Apple customer, I absolutely want them to have a ton of money stashed away for safety, so they don't get into that situation again.

However a small dividend would be a good idea probably, since some pension funds are not allowed to invest in companies that don't issued dividends.

Agree, likely scenario. They will always keep a bundle stored away. You are right on that.

I almost don't care what pension funds can do. I can see they can scarcely make %10 in a good year.

I don't understand the dividend situation enough to respond intelligently.

But, I do wonder about the stock share price compression talked about here.
How come Microsoft split and split, a single share from the 80's would be worth a million. How come not Apple? They've made enough money, right?

I do think it's half hedge fund manipulation and half culture clash, at least in the sense that Apple does things without consulting the customer, is heavily artistic, etc. Quite unlike the Microsoft example. I sure wish there were a way to get the stock to split so more people would be enticed to buy a few shares, and fund managers...anything to get the stock out of the maw of the hedge monster.

http://finance.yahoo.com/echarts?s=A...urce=undefined

Apple and Microsoft are not that different over the really long term.

Not sure I followed much of that, but if you think companies jumping into unrelated industries are such great drivers of growth, you might want to check out the history of same. And if you don't know what real investor panic looks like, watch what happens if/when Apple announces a massive investment in some sort of wild scheme like the one you evidently favor.

I got what I got by investing in a consumer electonics company 13 years ago when hardly anyone believed they could even survive. Fortunately they spent the intervening years perfecting their approach to the business they were in, instead of chasing some wild hare.