On Apple’s Capital Return Program

Thursday, 9 February 2017

Eric Jackson, writing for Forbes:

I have been a staunch critic of Apple’s capital return plan since it started in 2012. I think it signals to Wall Street that Apple is out of growth ideas, which is preposterous even though it’s now a $700 billion market cap company. […]

I think I remember some Wall Street analysts defending the dividend component of the Apple capital return plan in 2012 because it would “bring in a whole new class of investors to the stock.” Congrats on attracting a few more widows and orphans retail investors. […]

The whole capital return program has been a lot of work on Apple’s part to basically do a little bit of stock buyback.

He quotes from my 2014 piece, “Just Do Something”, which you should read now to refresh your memory. Jackson ends the quote from my piece (in which I admit that a years-ago acquisition of Tesla at least made some sense, and argue against Apple having bought WhatsApp, on the grounds that they already have iMessage), and writes:

I agree with Gruber about WhatsApp (and the Tesla discussion) but the rest was wrong then and is wrong now. And as time goes on, history is demonstrating the folly even more of this precious Apple type of thinking.

I don’t see how history is demonstrating the folly of this. Apple is doing fine, and they’re not sitting still. Since 2014, they’ve added “second biggest watch company by revenue” to their portfolio.

You can look back and say that Apple could have bought Facebook for $100 billion back when they were privately valued at $50 billion. I don’t think that would’ve been a good fit, though. A Facebook owned by Apple since 2011 would not be the Facebook we know today. There’s no integration between Apple and Facebook — the only thing similar about them is that they make a lot of money.

Instagram is more of a maybe. It might have only cost Apple $1 billion (which is what Facebook paid for it), but if Apple had bought Instagram they almost certainly would have kept it iOS-only. If you recall, Instagram released their Android version on 4 April 2012; Facebook’s acquisition was announced just five days later. Phil Schiller deleted his Instagram account a few days later.

You can’t buy Beats for $3 billion and then say you can’t (or shouldn’t have) buy Netflix. If Jimmy can work at Apple, so can Reed and Ted.

I agree with this, partly. But maybe Apple does too. Regretting not buying Netflix might be one of the reasons they bought Beats. But 2014 was too late to buy Netflix. Look at Netflix’s market cap from the last four years — by 2014 (the year Jackson wrote his early piece encouraging more M&A from Apple) Apple would have had to offer at least $30 billion for Netflix. Maybe more. The lowest their market cap dipped to was around $20 billion. The time to buy Netflix was 2012, when they could have gotten them for maybe $4-5 billion or so, roughly the same scale as what they paid for Beats in May 2014 ($3 billion).

An argument about whether Apple should have bought Netflix needs to have started in 2012, not 2014.

Should Apple do more dividends or use the cash to do M&A?

They should immediately cancel all dividends, wipe out their debt, and (without saying they will) start doing smart, focused, and sometimes expensive M&A.

Investors want to pay for growth. Apple needs to articulate how they’re going to grow. They snoozed on Facebook, Instagram and Netflix when they were younger. Those opportunities are probably gone.

I would strike the “probably” from that sentence.

Here’s the thing. I don’t disagree with Jackson. But I don’t think Apple does either. I think they’re constantly and aggressively hunting for small companies to acquire. I strongly suspect they acquire more of them than we know about — they confirm acquisitions, but seldom announce them.

I don’t think Apple’s dividends are holding back their M&A in any way. There is no company they should buy that they can’t because they don’t have enough money.

But I’ve never been a fan of Apple’s dividend program. Dividends are something big traditional corporations do. Apple certainly is big, but they’ve never been traditional, and never should be. Their success is entirely rooted on the company having a different viewpoint.

I prefer their old strategy, of simply letting their cash pile grow and grow and grow. And it has grown, even after they instituted the capital return program in 2012 (dividends, stock buy backs, and debt). This tweet from Horace Dediu visualizes it nicely.

Lots of people say “A publicly held corporation can’t just keep accumulating cash, they have to give it back to the shareholders.” But that’s not true. They’re still growing their cash hoard — they’re only giving a portion back to the shareholders. But the thing is, I don’t think Apple has been rewarded for this capital return policy. Their stock is up since 2012, but I think it would be right around the same price in the alternate universe where they’d just continued hoarding all their profits.

So what if no other company has ever accumulated so much cash? The cash itself — and the accumulating interest earned through investments by Apple’s asset management subsidiary Braeburn Capital — is a monstrously powerful weapon that they can threaten to use at any time. Apple’s cash is its Death Star. The bigger it grows, the better.

But ultimately, Apple needs to do what it has always done. They need to invent their future, not buy it.