Apple’s recent decision to declare
a first time dividend later this year is not a windfall for shareholders.
Company management must have its reasons for departing from the longtime
no-dividend policy of Steve Jobs, but shareholder wealth augmentation is not
one of them.
Theoretically, when a company pays
out a dividend to shareholders, it reduces the value of each share of stock by
the amount of the dividend. All other things being equal, a company with a
share value of $100 would see its share price drop to $95 the day after a $5
dividend.
So, what is the benefit to
shareholders? Let’s assume an individual shareholder is going to get a $600
dividend from Apple. Receipt of the dividend constitutes a taxable event, and
15% or $90 must go to the IRS. If the shareholder really needed $600, he could
have sold about one share of Apple stock. In that case instead of paying tax on
the whole dividend, the shareholder would only pay a 15% tax on his gain. If the
stock had cost $300, then he would have only paid 15% of the $300 gain.
While dividend paying stocks like
utilities have lately been attractive to investors, nothing prevents a
shareholder from selling stock to generate income. Many years ago a client told
me that she needed income but never considered selling a few shares each year
of a very large stock holding that had appreciated in value.
Perhaps taxes were one of the
reasons that led the legendary Steve Jobs to resist the temptation to pay
dividends during his long career at Apple. I’m sure it wasn’t the biggest
reason since growing the business and keeping it on a firm foundation seemed to
have been his top priorities. Warren Buffett has also resisted the temptation
to declare dividends at Berkshire Hathaway.
It seems to me that Steve Jobs did
more in his tenure at Apple to create wealth not only for himself, for his
thousands of employees, and for millions of shareholders than all the community
organizers and protestors who complain of the disparities of wealth in this
country. Isn’t it ironic that the “Occupy” protestors all use iPhones, iPads,
and iPods? ###
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