Non Apple Shareholders Getting Antsy in Windowless Conference Rooms

In my previous life, I worked in sales for a software company.  Our sales conferences were in some of the most beautiful places in the world.  Knowing that we would be stuck in windowless conference rooms from sunup to sundown – we would always get to the location a few days ahead of time to enjoy the lay of the land. If we had been in Newark – no one would have cared, but being in Hawaii knowing that the perfect day was only a few steps away was torture. That must  be how non-Apple shareholders have felt over the last 10+ years.

Apple has been an institutional stock favorite and has  rewarded growth investors handsomely.  Value investors are finally getting a crack as Apple’s valuation has been compressed due to Wall Street’s disbelief that a company of its size can continue growing earnings and revenue at such a clip.  Practically all classes of investors have had an opportunity to enjoy the sunshine except fund managers restricted to investing only in dividend paying stocks.  Now that shareholder unfriendly Steve Jobs has passed away –  it is time for a dividend dammit!

CNBC’s Karen Finnerman makes her case at the 5:20 mark.

Finnerman begins her rant stating the Apple has been a horrific allocator of capital.  She goes on and on about how Apple should have been buying back shares instead of stock piling cash. Maybe she is not aware that Microsoft and Cisco, to name a few, have been pissing away cash buying back stock for years with ZERO impact on their stock’s price. She is adamant that investors should take advantage of a window between October 26 and November 25 to propose that Apple’s Board of Directors addresses the company’s cash hoard by initiating a share buyback or dividend program. A windowless conference room in Maui can get your gander up.

Here is one of the best explanations I have seen on how Apple uses its cash stockpile (Quora).

Apple actually uses its cash hoard in a very interesting way to maintain a decisive advantage over its rivals:

When new component technologies (touchscreens, chips, LED displays) first come out, they are very expensive to produce, and building a factory that can produce them in mass quantities is even more expensive. Oftentimes, the upfront capital expenditure can be so huge and the margins are small enough (and shrink over time as the component is rapidly commoditized) that the companies who would build these factories cannot raise sufficient investment capital to cover the costs.

What Apple does is use its cash hoard to pay for the construction cost (or a significant fraction of it) of the factory in exchange for exclusive rights to the output production of the factory for a set period of time (maybe 6 – 36 months), and then for a discounted rate afterwards. This yields two advantages:

  1. Apple has access to new component technology months or years before its rivals. This allows it to release groundbreaking products that are actuallyimpossible to duplicate. Remember how for up to a year or so after the introduction of the iPhone, none of the would-be iPhone clones could even get a capacitive touchscreen to work as well as the iPhone’s? It wasn’t just the software – Apple simply has access to new components earlier, before anyone else in the world can gain access to it in mass quantities to make a consumer device. One extraordinary example of this is the aluminum machining technology used to make Apple’s laptops – this remains a trade secret that Apple continues to have exclusive access to and allows them to make laptops with (for now) unsurpassed strength and lightness.
  2. Eventually its competitors catch up in component production technology, but by then Apple has their arrangement in place whereby it can source those parts at a lower cost due to the discounted rate they have negotiated with the (now) most-experienced and skilled provider of those parts – who has probably also brought his production costs down too. This discount is also potentiallysubsidized by its competitors buying those same parts from that provider – the part is now commoditized so the factory is allowed to produce them for all buyers, but Apple gets special pricing.

Not very many companies have the capacity or the know-how to think at such a high strategic level, so they simply do the expected – use excess cash to buyback stock or pay a dividend.  Unfortunately, Apple’s stock price is paying a price (compressed P/E) for not being ordinary. That being said, the stock is near its all-time high and other than the non Apple shareholders – not many are complaining. I expect that Finnerman’s proposal will get very little support at the annual shareholders meeting.  After the meeting she and the other non shareholders can go back to their conference rooms – while the rest of us catch a few rays.

Disclosure: Long Apple.

banner ad