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Steve Cook, CEO at Apple, is actively working on it. He goes further: “I don’t like it either,” he says. The world’s largest company has seen its share price slide, and a growing chorus of voices are calling for the company to start dishing out its huge cash pile. But this debate goes beyond Apple. There is a mountain range sitting on corporate balance sheets, a mountain range made of cash. Is it time we saw a financial earthquake designed to flatten those mountains and pump up shareholders’ pockets, via dividends?


I know a man whose family used to own a large department store.  It had been in the family for several generations, but the store was looking tired, and was in desperate need of investment. There was a snag. The original founders had written a trust agreement for this company which meant that the business was not allowed to borrow against the property and land that it owned. The store was worth millions, and in an ideal world its value could have been used as security against funding for investment. But in the real world this was forbidden. So the store went on looking tired, until eventually the family owners decided to sell-out altogether. They sold the land and property that it occupied. It was a sad day, and a once locally famous department store was replaced by a mismatch of here today, gone tomorrow small shops.

I tell that story to illustrate a point. The original family members who created the business wanted a legacy; a legacy to last in perpetuity.  So they tried to build in certain safeguards. Nothing lasts forever, of course, including safeguards.

But for those who follow the history of successful family businesses it is a familiar story. Until a few years ago Sainsbury’s was very much a family business, decisions were made by its family shareholders to try to safeguard the business as much as possible, forever.  The result: Sainsbury’s didn’t take risks. It is different now, and Justin King has done sterling work turning the company around, perhaps creating the foundations for it to one day challenge Tesco again. He may also have created a store that is slightly less likely to be around in say 100 years’ time, however.

My point is that if you want a company to last then dividends may not be such a good idea. Instead, reinvest profits and build up the company. Or even keep cash on the balance sheet, or invest into other businesses, and on the stock market. Use the cash to diversify as much as possible. Company valuations are supposed to be calculated by looking at projected future dividends and discounting them by a rate of interest to give a net current value. Sometimes the conclusion from such an equation is that it is better for a company to liquidate, sell off all assets, and give all the resulting cash to shareholders. Sometimes, the equation suggests a company needs to pay out much greater dividends, even if by doing so the business’s long term prospects are weakened.

But a firm’s management, especially if that management has some kind of family connection with the business’s founders, may have different priorities. They may not be wholly in accord with the idea of maximising shareholder value; they may want to create a legacy. It is something the UK media fails to grasp. Money is not the only motivation of entrepreneurs. They have many motivations, in fact, but among them is the desire to create something that they can be proud of; to change the world in some way; to create a legacy. To that way of thinking, dividends, or at least really high dividends, are an anathema.

Now look at Apple. For some people the company inspires something far beyond money. Traditionally, its users seemed to have had an affinity to the company that was closer to the support a football team may enjoy than anything an economic model based on rational expectations or profits could explain. Now Apple is so vast that devotion has changed a little, but within the company itself Apple still seems to hold an almost mystic attraction. In a way Apple is like a family business of old; it’s just that its staff loyalties go beyond mere DNA. Steve Jobs may be dead, but the feeling of pride held by staff, who work for the company, is not just about money.

David Einhorn’s hedge fund Greenlight Capital has resorted to the courts to try to get Apple to pay out dividends. Cook has called it: “A silly side show.”  And for the Apple dream, it is indeed a sideshow. For those who are in love with the Apple philosophy and want Apple products to dominate the world forever, dividends are a bad idea. It is better to invest every cent into innovation.

It is just that sometimes entrepreneurs and those who hold loyalty to an idea, are not rational and are not objective.

Companies fail. And companies that are not allowed to sell assets, or engage in share buy-backs may think they have secured their future, but in truth they may just be creating a zombie company of the future.

Dividends may have the effect of diminishing a company’s fortifications, making it less able to survive. But in the long term, dynamism hinges on competition. Ancient Sparta, and for a while even Ancient Rome, were not surrounded by walls, because it was felt that the lack of fortification would mean that their soldiers would be better fighters as a result. Companies that try to guarantee their future may actually be acting to suck dynamism from the economy.

 

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


Showing 1 comment

  1. Michael,

    The debate about corporate cash piles is an interesting one.

    As another example, British American Tobacco (BATS) has recently issued results: profits increasing, dividends increasing though sales down due to folks trading down in the recession and counterfeiting/smuggling/taxation.

    BATS has just announced a £1.5 billion share buy back. This buy back is actually larger than the market caps of most FTSE250 companies.

    It’s somewhat difficult for the company to go on a mergers & acquisition buying spree, as it is now sufficiently large to run into major competition and regulatory hurdles. It has tried diversification in the past: buying up insurance companies like Eagle Star – which, ultimately, lost a lot of shareholders money.

    So what else can large companies such as this do with their money?

    Once they reach a certain size, in effect they become govt. approved mon/du/tri-opolies – or utilities if you prefer.

    Vodafone is probably another company that appears to have reached the end of the road in this respect.

    Perhaps this is not such a bad thing: plenty of investors are quite happy to receive a regular 4-6% dividend when cash in the bank loses money in real terms.

    Perhaps innovation is best left to smaller firms, where larger firms can assist with loans for cash and/or equity.

    And therein lies one solution to the zombified banking system.

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