My letter to Tim Cook. CEO of Apple
Mr. Tim Cook,
Hi. First let me briefly state I am a long time Apple user since the Mac Plus era. I own iPhones, iPads, iPods and iMac’s. Everyone in my family owns them. I also am a long time shareholder of Apple stock with a substantial stake.
It disturbs me as a huge fan of Apple and a shareholder to see the media and the market take down both the stock and the company along with it. I believe there are specific reasons for this and things Apple can AND should take action against to defend both. When a stock gets broken (and Apple, the stock, is broken now) psychology changes. People look for reasons why the stock is in free fall and they find reasons whether real or not. People must define why things happen even when they are random or unrelated to the underlying company. I believe this is the case. One has to be careful that the stock does not begin to tarnish the brand as people seek out negatives.
So one question as an investor/shareholder I ask as I am sure others do is “If Apple does not believe in their stock at these absurd low valuation levels why should I?” The 10B buyback merely offsets option dilution. At this valuation Apple could bring confidence with a 50B buyback over say 3 years. Even if you had to borrow at low rates and deduct the interest on the loan to do this it would be confidence inspiring and immediately accretive to earnings. You would still have 80B in cash and it would grow 50B plus annually for at least two years. In the meantime after investment gains Apple’s cash erodes about 3% annually to inflation which is almost $4 billion per year.
Additionally a dividend could be paid ahead of the fiscal cliff with no net change to Apple’s balance sheet at the end of 2013. The sensitivity to the coming tax changes would signal Apple’s management cares about shareholders. Right now I’m not sure that belief is held anymore. You could also issue a special dividend or increase the annual dividend as a show of the boards confidence in the future. Options are plentiful. No action is not the best option here.
Remember a stock is nothing more than a piece of paper if dollars do not come back to shareholders. It is similar to gold. Gold pays nothing. Apple right now pays 2% but it would take 50 years at that rate to get your investment back. Not significant enough to support the stock or attract shareholders. A stock without a significant dividend becomes just something that you hope somebody will pay you more for down the road.
It pains me as an Apple fan and shareholder to watch a great company and stock both suffer at the hand of the media and market while Apple sits by and does nothing to defend either. Apple has blown away earnings on top and bottom line before only to see shares fall on that press release. At some point psychology can get so bad that people will always hold the stock down at absurd low multiples just waiting for failure whether it takes a few years or a decade. Sentiment now thinks Apple is becoming the next Sony. Even if you crush earnings the next few quarters this sentiment may not change. People will always think Apple is just a few quarters away from its eventual decline. A non virtuous circle
The weapons Apple has to show confidence are many. Significant buyback of shares would be the biggest vote and most effective tax wise. Second is a dividend increase and special dividend with possible pull forward ahead of the cliff. Last is a stock split. While I know you think this makes no difference I disagree. There is a psychology and obsession with high share prices. High prices mesmerize people. I was a psychology major and see it firsthand on tv and in person. Real world prices matter and even though it’s just slicing the pie up people cannot make the disconnect. Even the MBA’s and professionals know technically there is no difference they too fall prey to this. It is human behavior. A 10 or 15 for 1 split would alleviate this and show the company is confident in the future. I argue if it makes no difference then just do it. At worst you get an advantage you did not think existed. It will get everyone off the high share price obsession which is very real. 99% of investors don’t know how a $500 or $700 stock can be “cheap” yet Apple is.
I close with thanking you for time and consideration. Also would like to say I think you and the entire team are doing a fantastic job. I follow Apple closely on a daily basis as it is my largest investment and in my view nothing is broken with Apple products. However with the financial management and stock management there are some things you may wish to consider and plead that you do.