Yesterday Apple held a press conference where they declared that they would start releasing some of their almost $100 billion cash hoard through dividends and a $10 billion stock repurchase plan. Many investors and commentators felt the announcement was underwhelming and even somewhat of a disappointment. Most thought the dividend could have been higher or that Apple could have spent the $100 billion in better ways just as giving factory employee’s a raise, or reinvesting it in the company. But these suggestions are misguided.
Apple had to release the funds to the shareholders, as it is one of the main purposes of the directors to maximize shareholder wealth. While maximizing shareholder wealth is not the end all be all; it can subject the company to troubling lawsuits. The best and most pointed example of this is a 1919 case with another storied company, Ford. In Dodge v. Ford, 170 N.W. 668. (Mich. 1919), Henry Ford had just started Ford motor company and was rolling in unheard of profits. Originally these profits were paid out to shareholders in the form of a special dividend. One of those shareholders was the Dodge Brothers (Yes, the founders of the Dodge car company.) Ford then decided that the incredible profits would be better spent on building new plants, paying its employees more, and in general, bolstering the community as a whole. Unfortunately for Ford, the court held that Henry Ford could not arbitrarily withhold some of Ford’s cash hoards or use that money for community or philanthropic purposes and that one of the main goals of a corporation is to create shareholder wealth. Therefore he was ordered to pay out the excessive cash hoards to the shareholders.
Here Apple is much in the same boat as Ford was back in 1919. There is only so much money Apple can legitimately keep on its books before some of its shareholders get fed up and sue, just as the Dodge Brothers did in 1919. Sure they can hold some cash for research and development, buying other companies, building better products, factories, or supply lines, but $100 billion is not justifiable. So all the calls for Apple to pay its employees more, invest in education, give millions of iPads to schools, and the like are simply misplaced. Apple would have an extremely hard time justifying these activities to its shareholders or a judge for that matter as sound business judgment.
Apple did the only thing it really could do; return the cash to its shareholders. While underwhelming and disappointing to some it was the most practical and realistic choice for Apple. It takes the scrutiny off of the massive hoard of cash, doesn’t subject them to lawsuits from shareholders, and allows them to keep most of the money on deck as they’ll only be releasing an estimated $45 billion (about half) over the next three years. And at least initially the market seems to respect this decision as APPL stock was up 2% a day after the announcement.
As always you can follow me on twitter @Ungulaar.
Apple Press Info – http://www.apple.com/pr/library/2012/03/19Apple-Announces-Plans-to-Initiate-Dividend-and-Share-Repurchase-Program.html (3/20/12).
Dodge v. Ford Motor Company, 204 Mich. 459, 170 N.W. 668. (Mich. 1919).
Apple dividend is acknowledgement of investors’ concerns about cash hoard http://www.washingtonpost.com/business/apple-dividend-is-acknowledgement-of-investors-concerns-about-cash-hoard/2012/03/20/gIQAP23QPS_story.html (3/20/12).