Forget Apple, Focus on What's Next Instead

I'm sure you've heard the sad news by now: The genius factory at Apple (Nasdaq: AAPL) is finally out of ideas. New CEO Tim Cook, who took the reins of the $576 billion company from legendary founder Steve Jobs after Jobs' October 2011 death, made a rambling announcement about the new $2.65 dividend on March 19. Cook, reversing Jobs' long-standing reluctance to return cash to shareholders, said he wanted to broaden the appeal of Apple shares to a wider investor audience. This is, of course, pure and utter nonsense. Dividend investors are hardly going to be clamoring for the decidedly wimpy yield Apple's shares will be paying, about 1.8% assuming the price holds near $600 a share. If the stock continues to rise, then this yield falls even more. Consider this: 397 out of the 500 companies in the S&P 500 pay a dividend. Apple's will rank a lackluster 257th on that list. Now given, this dividend can (and probably will) rise going forward, but it's going to be a while before this becomes a stock for dividend lovers. If Cook really wanted to increase Apple's appeal, then he'd split the stock 20-for-1 and bring the price down to $30 a share. That changes absolutely nothing about the company's fundamentals, of course, but it makes the shares "seem" more affordable. Sticker shock sets in at $100 a share. At $600 a share, most investors simply don't have any frame of reference.

That the share price is so high is a big reason why Wall Street can't understand how to value the company. More notably, however, the dividend move was seen as a concession to growing pressure that Apple "do something" about its massive cash hoard, which totals nearly $100 billion. This is materially significant. Apple is not a company that has ever bowed to pressure. More than that, the notoriously secretive company has never even remotely cared what Wall Street, the blogosphere or anyone else does or says. From that position, Apple led the news and set the trends, never following either.  Apple was allowed to be different because its CEO was regarded almost universally as a visionary genius. He got to play by special rules we allow to the amazingly talented. But Cook is not that guy. He is merely very good. The dividend announcement signals that the Jobs era is indeed over, and the company now is applying for membership in the League of Above-Average Companies. It is not a serious misstep by Cook. That's too harsh. It is simply the new reality. So the worthwhile question at this point is why Cook did what he did. Let's think about that... Clearly Wall Street (Proud motto: "Never satisfied") always wants to see a number of things. When the talk turns to balance sheets, the name of the game is always return on equity (ROE). (This is the measure that that fellow in Omaha uses to gauge his progress.) "ROE" is determined by dividing the bottom line on the income statement -- that is, net earnings -- with the "net asset" or "book" value on the balance sheet. For Apple's most recent annual period, that ROE figure looks like this:      Net earnings (Year ended Sept. 24, 2011): $25.9 billion      Shareholder equity: $76.6 billion      = 25.9 / 76.6 = 33.8%. That looks like a pretty good return, right? After all, the total return of the S&P 500 has beat that only twice since 1965. But look more closely, and this emerges as a remarkably stellar return. I screened for S&P 500 companies with no long-term debt (there are only 29) and then ranked them by their most recent quarterly return on equity. Apple came in first, at 45.6%. The next closest was Paychex (NYSE: PAYX), with a 35.8% ROE. Apple beat that by 10 percentage points. So Apple simply cannot, under any stretch of mortal imagination, be even remotely concerned with its ROE. Well, how about growth? Apple has certainly delivered here. Consider the past four years' worth of revenue data, shown in the table to the right. From 2008 to 2009, Apple grew revenue 32%, then 52% the next year and 66% the year after. That's an average revenue growth rate of 50%. What is the logical extension of that?    

Frankly, I don't know. But it follows that if Apple can sustain that sort of growth for 12 years, its revenue would exceed the entire U.S. gross domestic product. Clearly, that's not possible. Apple is initiating a dividend because it knows it can no longer generate that sort of growth, or, if you prefer, it knows that it cannot reasonably sustain it long-term. The company is simply out of ideas to deliver material growth, and it evidently doesn't see other companies out there it could buy to deliver additional return. Even with all the money in the world, Apple can't figure out "What's Next." That's why it was sad when Tim Cook said the company had more cash than it needed to run the business. All businesses need cash to finance growth, and Apple, in the absence of Steve Jobs, doesn't have any ideas for how to do that. It doesn't have another iPod, iPhone or iPad up its sleeve. It has incremental advances for its existing suite of gizmos. Alas. Tips>> Some might be chagrined or outright saddened by this. I confess that I am a little: My wife and I have seven Apple devices in our house. But -- and I really want you to hear this -- the reality is that there is another Apple out there. There is another Facebook in another dorm room -- another Google (Nasdaq: GOOG). Even another Berkshire Hathaway (NYSE: BRK-B). In my newsletter, Game-Changing Stocks, I tell readers that we too often fixate on the hot companies grabbing headlines today, and not on the companies that will make news a few years from now.