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3 Reasons Why Apple Shouldn't Pay a Dividend

Chris Ciaccia|Technology Reporter
Wednesday, 25 Jan 2012 | 2:43 PM ET

Apple had $97.6 billion in cash and cash equivalents at the end of its most recent quarter, and despite calls for a dividend, analysts say this may not be the best course of action.

From Apple's impressive return on equity, to the need for continued innovation, and even future acquisitions, there are plenty of reasons for the iPhone maker to avoid a dividend.

Sure, there have been plenty of calls for Apple to do something with its cash, particularly now that a new CEO's at the helm. During his fourth-quarter conference call Tim Cook said that he was "not religious" about holding Apple's cash, prompting speculation that a dividend or share buyback could materialize. This issue continued to reverberate around Apple's first-quarter conference call late on Tuesday.

Return on Equity

Apple has a return on equity (ROE) of 41.67 percent according to Yahoo! Finance, highlighting the company's massive profitability. It means that of every dollar Apple invests, it earns 41.67 cents in profit.

Other tech heavyweights pale in comparison to Apple's impressive ROE. Google, for example, has an ROE of just 18.66 percent, while Research In Motion, and Hewlett-Packard come in at 21.43 percent and 17.73 percent, respectively.

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One theory behind paying a dividend, of course, is that the company cannot find a better use for its cash, and as such, must return it to shareholders. This, however, is not the case at Apple.

Ironfire Capital's Eric Jackson said Apple has had a "phenomenal" return on its research and development dollars, especially when compared to software behemoth Microsoft. "I think Apple could make the argument that a high ROE is its way of saying it knows what is best for its cash." Jackson is long shares of Apple.

Innovation

There have been worries that Apple's innovation engine will slow without Steve Jobs at the company's helm.

"The major risk in the Apple story is that the company may no longer be able to innovate at the same rapid pace or with the same disruption that characterized the era when Steve Jobs was at the helm," wrote Needham analyst Charlie Wolf in a research note. Wolf rates shares a buy with a $540 price target.

When Jobs passed away, there were rumors that he had left Apple with a product pipeline of four years. Morningstar analyst Michael Holt wrote in a research report that "a full pipeline of Jobs-approved launches will fuel growth for the foreseeable future." Holt has a fair value of $540 on Apple.

Apple sold a phenomenal 37.04 million iPhones, 5.2 million Macs, 15.43 million iPads, and 15.4 million iPods during the first quarter.

The next area of innovation may be the much-rumored Apple TV. Piper Jaffray analyst Gene Munster asked about the company's living room strategy during Wednesday's conference call, and while CEO Cook did not hint at a television set forthcoming, many expect it for later this year or early 2013.

Acquisition Strategy

Tech companies that tend to pay dividends have been seen as low-growth, lacking other alternatives for their cash, such as potential acquisitions.

In a recent interview, Sterne Agee analyst Shaw Wu said that Apple may eventually pay a dividend, but noted that the firm is likely to use its cash pile to purchase content for the upcoming Apple TV.

"We hear that content is what is holding back the Apple TV," Wu said. Wu rates shares “buy” and recently raised his price target to $550 from $540 in light of the quarter.

With Apple having $97.6 billion in cash at the end of the quarter, $64 billion of which is overseas, the cash haul can be used for offshore acquisitions which will help the company, Ironfire Capital's Eric Jackson said.

Jackson noted that Apple tends to do smaller acquisitions, typically valued at less than $500 million. These acquisitions are usually transformative in nature, and help Apple's ecosystem.

"Siri is a prime example of acquisition strategy that has helped Apple, as it has helped iPhone 4S sales," Jackson explained.

The most recent acquisition Apple did was that of Anobit, an Israeli flash-memory company.

Oliver Pursche, pesident of Gary Goldberg Financial Services and manager of the GMG Defensive Beta Fund said, "The big question for Apple looking forward is what they'll do with the $97 billion with cash. I'm not in the camp of them paying a dividend. Strategic acquisitions will continue to play a role in their growth strategy."

Additional News: Apple Crushes Profit Estimates as iPhone, iPod Sales Soar

Additional Views: Apple Would Be Even Bigger With Dividend: Analyst

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TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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