Apple’s announcement that they will start paying dividends to shareholders changes a number of things in Apple’s business model and those of many other businesses.
The sheer size of Apple’s cash reserves also illustrate how profitable the outsourced manufacturing model is as well the contradictary nature of special pleading by affluent corporations.
Moving a cash mountain
Not only is Apple’s business insanely profitable, but sales are growing exponentially. In the company’s conference call, CEO Tim Cook reported that 37 million iPhones sold last quarter and 55 million iPads sold in the last two years.
Apple’s CFO Peter Oppenheimer pointed out the company’s cash reserves increased $31 billion in 2011 and 2012 is on track for a similar result in 2012, leaving them plenty of money for investment along with a “warchest for strategic opportunities”.
Paying a dividend
The reluctance to pay dividends has been a feature of the US corporate for the last few decades and Apple are certainly not alone in not distributing their profits to shareholders.
Companies like Microsoft, Google and Oracle -even Yahoo! once upon a time – have been just as profitable as Apple and their efforts to shrink their cash mountains has had some perverse effect.
Many of these companies have squandered suprpluses on poorly thoughtout and badly executed buyouts of smaller businesses, this urge to avoid returning money to owner has been one of the drivers of the Silicon Valley VC Greater Fool model.
Another result of fat profits is the rise of flabby, overstaffed management ranks at some of these companies. Although this certainly isn’t the case at Apple where Steve Jobs ran a very lean machine.
The retail model
Unlike their major tech competitors Apple is a manufacturing and retail business as well. In 2012, 40 new stores are planned around the world.
This vertical control of their markets, from the beginings of the supply chain to “owning” the end customer is anathema to modern MBA thinking and probably the area that gives them the greatest competitive advantage over their hardware competitors.
Justifying Mike Daisy
In some ways this announcement justfies Mike Dasy’s discredited criticisms about Apple’s Chinese suppliers.
The reason for manufacturing these goods in places like China, India or Vietnam is the vastly cheaper cost of doing business, not just in labour rates but in reduced environmental and safety standards.
Plenty of brand name clothing, footware and fashion accessory companies make similar massive profits to Apple with their ten, twenty and sometimes hundred fold markups on their products.
Repatriating profits
One of the big changes of Apple repatriating money is that is undercuts the special pleading by these extremely profitable companies that they should have a US tax holiday so they can repatriate their riches.
It’s now clear these companies can easily afford to pay the taxes of their home countries and it’s time they started to, along with returning dividends to their shareholders.
Once again Apple have changed the way others do business, how these changes affect the way we invest and governments treat companies is going to be one of the most interesting developments over the next decade.
Good article, Paul.
I was thinking that it would be a tremendous act of goodwill and encouragement to US manufacturing, if they spent some of their money creating at least some home production.
They could play the ‘competitive state, game, and they have the low US dollar to help.
I guess this is not in the MBA handbook.