Last week, Apple declared that it would pay its shareholders a dividend for the first time since 1995.
The market’s reaction? It paused for a moment. Then it yawned. It might have even groaned a bit. The value of Apple’s stock barely budged, beginning and ending the week trading at $599 per share.
Huh? Why did a successful company’s announcement of a new dividend payment policy generate so little enthusiasm? And why might Apple’s declaration mark the end of an era in the internet technology sector?
The Best Alternative Use
The convention wisdom states that dividend payments represent financial gratuities that companies pay shareholders to thank them for their loyalties. That’s why US Airways decided to name its frequent flyer program Dividend Miles, in order to convey the optimistic message that its “dividend” point awards are expressions of appreciation for its customers.
But dividend payment decisions may convey relatively pessimistic messages as well, signals that tend to worry equity investors in high growth firms. Namely, dividend payments may be perceived as desperation measures, payments that are authorized when firms have run out of attractive growth opportunities in which to invest their funds.
Tobacco companies, for instance, often make sizable and stable dividend payments to their investors. Why? Because they tend to earn significant cash profits, but are unable to find investment opportunities that are more attractive to their shareholders than the prospect of simply receiving payments. For instance, Philip Morris (of Marlboro fame) once tried diversifying into the food business by purchasing Kraft, and RJ Reynolds (for its Winston brand) once dabbled in the development of a smokeless cigarette. But neither firm was able to turn those opportunities into enduring successes.
So, based on the stock market’s reaction last week, it appears that investors may have interpreted Apple’s dividend decision as a pessimistic message regarding its future growth prospects. And interestingly, the lingering memory of Steve Jobs may have influenced their opinions.
Bracketing An Era
It’s no coincidence that Apple’s most recent dividend payment (prior to last week’s corporate announcement) occurred in 1995, one year before Steve Jobs returned from exile with Apple’s purchase of NeXT to turn around the company’s fortunes. The newly announced dividend will be paid later this year, approximately one full year after Jobs passed the mantle of leadership to his successor Tim Cook.
Indeed, these two dividend transactions serve to bracket the transformational era of Steve Jobs’ second stint at Apple’s helm. Although the firm first decided to suspend its dividend payments in the 1990s because of extreme financial difficulties, very few investors ever pressured it to pay dividends during the early years of the 21st century. And that made perfect sense; after all, why would investors ask a company to pay dividends to its shareholders while it needed the cash to invent and introduce iPods and iPhones and iPads to millions of new customers around the world?
At the time of his death, Jobs was rumored to be focusing intensively on television as Apple’s next great development opportunity. And at the time, in characteristic fashion, Jobs was refusing to consider any plan to authorize dividend payments. But under Tim Cook, the firm has struggled to find a path to break into the television industry, and the firm’s hoard of unspent cash has climbed to $100 billion. Thus, with no preferable alternative use of the cash readily available for investment purposes, Cook decided to pull the proverbial trigger and authorize the dividend payment.
The Microsoft Analogy
When was the last time a high flying technology firm faced a similar decision? On January 16, 2003, Microsoft decided to declare a dividend in order to deal with its own $40 billion hoard of unspent cash. But just one year later, on February 4, 2004, Harvard University student Mark Zuckerberg launched thefacebook.com from his dormitory room, and Microsoft has been scrambling to compete in the social media era ever since.
Would Microsoft have been better served keeping the funds that it decided to pay out as dividends, and developing or acquiring its own social media network to compete with Facebook? Arguably, it has attempted to execute similar strategies in a couple of industry sectors, by developing the search engine Bing to challenge Google, and by purchasing the communication service Skype to compete with various voice and text messaging firms. But these competitive strategies have failed to restore Microsoft to its former position of industry dominance.
Indeed, in retrospect, Microsoft’s 2003 announcement appears to have marked the end of an era that was dominated by desktop computers and their independent software programs, and the beginning of an era of mobile devices and their cloud-connected service systems. With newly emerging firms like zynga and foursquare grabbing the attention of today’s technology investors, it’s possible that we’ll eventually look back at this week’s Apple announcement as the end of an era as well.