Apple, Berkshire and Dividends

[clifp]

The rumors of Apple starting to pay a dividend continue to circulate.

I find it interesting that at $2/qtr the yield on Apple stock will be 1.5% almost exactly twice the yield on 30 year TIPs bonds. Now Apple is no Coke and it is entirely possible that Apple will no longer be a major firm in 30 years. On the other hand Apple unlike Uncle Sam has no debt, and doesn't need Congressional action to pay its bills. More importantly Apple is accumulating cash at an astounding rate $75 billion this year vs 1.3 trillion in debt for Uncle Sam.

Now this isn't an Apple (sorry) to Oranges comparison. But one of the implication of 1.5% yield for Apple vs .78% for 30 years TIPs is that investors think the risk of Apple distributions not keeping up with inflation is twice that of Uncle Sam over the next 30 years. Now I don't expect either Apple to turn into the next Gateway Computer nor do I expect the US to turn into Greece, but either scenario is possible and both would very bad for investors. The big difference between this two investments is a retiree buying Apple stock has an excellent chance of seeing his income grow at rate far exceeding inflation. Where as the retiree buying a TIP bond know best case that he will be getting a whopping .78% interest payment that grows with inflation.

No wonder Buffett calls investing in government bonds return free risk.

Speaking of Buffett, this week has been Warren Buffett week for me. He released his annual shareholder letter, and I watched his lengthy CNBC interview, and read the Motley Fool Berkshire board and the various pundits.

My main comment are that it wasn't a very interesting read for non Berkshire shareholder. There were not many pithy observation other than his comments that single family houses in distressed areas are probably one of the best investment opportunities out there. Which I think is good news for real estate investors in FL, NV, AZ, and much of CA.

What was interesting to me a shareholders as well anybody else looking for undervalued stocks is his rather extensive comments valuing the stock.
Although the book value of Berkshire was up by 4.6% comfortable out performing the S&P 500 by 2.5%, the stock price has languished. (I add especially this year.) Book value increase has exceeded the SP500 for every rolling 5 year period starting in 1965 and of course over that period of time the value of Berkshire has increased by an astounding 19.8%. Buffett doesn't often comment about the price of Berkshire stock, but for the last 6 months he has all but shouting from the rooftops that is a screaming buy.

Whitney Tilson is a long time Berkshire stockholder and has an interesting analysis here. He thinks Berkshire is just $179K for the A shares or just under $120 for the B share compare to current $79 price.

Much like Steve Jobs replacing Warren Buffett is pretty much impossible, but much like Apple stock had already mostly priced in Job's death the same thing is mostly true for Buffett IMO. I'd also expect to see Berkshire start paying a dividend after he steps down (probably feet first).

[Free To Canoe]

Quote:

Originally Posted by clifp Now I don't expect either Apple to turn into the next Gateway Computer nor do I expect the US to turn into Greece, but either scenario is possible and both would very bad for investors.

Thanks for the thoughtful post. Apple is a great company and I don't want the observation below to sound negative.
Not only can Apple turn into the next Gateway, it has already done so once in my lifetime. If you don't believe Steve Job's comment that companies like Microsoft can be gone in 10 years, then you really don't understand the technology business.
The United States of America has never turned into Greece and this will not happen in my lifetime.

[Hamlet]

Yup, I own a little Apple, but it's never going to be a large holding for me because it is almost by nature very high risk.

It's business model depends on inovation. It has to stay ahead of the curve to continue to make the kind of profits that it currently does. That is hard to do consistently.

It's a great company though. I like having a few shares.

I was annoyed that they decided against a dividend though

Quote:

Originally Posted by Free To Canoe Thanks for the thoughtful post. Apple is a great company and I don't want the observation below to sound negative. Not only can Apple turn into the next Gateway, it has already done so once in my lifetime. If you don't believe Steve Job's comment that companies like Microsoft can be gone in 10 years, then you really don't understand the technology business. The United States of America has never turned into Greece and this will not happen in my lifetime.

[RockyMtn]

Apple is a very interesting stock/company. Look at the other companies that hit $500b in market cap over the years....Cisco, Microsoft, Exxon, GE, Intel. All ultimately took a significant tumbe backwards all for a variety of different reasons. The only real difference (which is big) with Apple is the PE of 10 or so with a $100b or so in cash when these others had inflated PE's when they hit the $500b level.

I'm actually hoping they don't pay a quarterly dividend. I would prefer a one time special dividend to whittle down the cash level.

[Disappointed]

Whitney Tilson is a long time Berkshire stockholder and has an interesting analysis here. He thinks Berkshire is just $179K for the A shares or just under $120 for the B share compare to current $79 price.

I have two A shares to sell and I will take $130,000 each. In fact, I will take $125,000 each. Very disappointing with the stock.

[audreyh1]

Quote:

Originally Posted by RockyMtn Apple is a very interesting stock/company. Look at the other companies that hit $500b in market cap over the years....Cisco, Microsoft, Exxon, GE, Intel. All ultimately took a significant tumbe backwards all for a variety of different reasons. The only real difference (which is big) with Apple is the PE of 10 or so with a $100b or so in cash when these others had inflated PE's when they hit the $500b level. I'm actually hoping they don't pay a quarterly dividend. I would prefer a one time special dividend to whittle down the cash level.

I am also hoping for a BIG one time dividend this year when we still have the 15% qualified dividend rate (and 0% for some folks).

[Texas Proud]

If Berkshire has a value of $120 per share and is trading at $79.... then the best use of the money they have is to buy shares... that will give their shareholders a better return on the money than a dividend...

[Nords]

Damn, Clif, I read the subject line of your post and thought I'd missed a press release. The day I see Buffett trending on Twitter is going to be a sad one.

Quote:

Originally Posted by clifp I'd also expect to see Berkshire start paying a dividend after he steps down (probably feet first).

Quote:

Originally Posted by Free To Canoe If you don't believe Steve Job's comment that companies like Microsoft can be gone in 10 years, then you really don't understand the technology business. The United States of America has never turned into Greece and this will not happen in my lifetime.

Apparently you have more faith in the U.S. government's active management than in Apple's active management. Or else you're really pessimistic about your longevity.

Personally I have more faith in Warren Buffett's "ham sandwich" theory of management.

[clifp]

Quote:

Originally Posted by Free To Canoe Thanks for the thoughtful post. Apple is a great company and I don't want the observation below to sound negative. Not only can Apple turn into the next Gateway, it has already done so once in my lifetime. If you don't believe Steve Job's comment that companies like Microsoft can be gone in 10 years, then you really don't understand the technology business. The United States of America has never turned into Greece and this will not happen in my lifetime.

I mostly agree with you and others about Apple. As I said Apple isn't Coke and the very nature of its business makes a more risky investment than an investment in KO or PG. Still I'd argue that for the last decade Apple has been a brand company and aspirational brand company at that. Brand value persists and can substitute for less than great products for several years. Although how much of Apple's brand is due to Steve Jobs is unknown.

I wish I was so confident about the USA, not predicting anything dire just saying that Black Swan are lot more common than we thought. Remember Greece use to be a super power with the most advanced government, a vibrant economy, and fearsome military that conquered the Mediterranean and beyond.

Of more relevance is the rapid fall of great powers over the last 150 years, and the consequences to bond holders. German 1870s defeated France, and soon the biggest economic power in Europe by the 1920s Weimar Republic bond holders were wiped out. In 1905 Japan defeated Russia, it weather the depression pretty well but by, 1945 it was in in ruins and so were Japanese bond holders. UK 1930s economic and military superpower, by the late 70s it was getting bail outs from the IMF before Thatcher took over. Long term bond holder (and at times England has offered 100 years bond) were ravaged by inflation . Soviet Union in 59 rising power and the leader in space race, by 1998 defaulted on its debt. One major difference between now and last century is it is easy to in-vision scenarios where the US government defaults but multinationals like Apple, GE, Google, Coke, P&G and their investors do just fine.

Now despite my little history lesson, I too would be very surprised if the US defaulted on its debt in my lifetime. (Although not at all surprised if we devalued significantly it via moderate to high inflation.). On the other hand the rewards of .78% real return are also so miniscule why take the chances?

[Nords]

Quote:

Originally Posted by clifp Of more relevance is the rapid fall of great powers over the last 150 years, and the consequences to bond holders. German 1870s defeated France, and soon the biggest economic power in Europe by the 1920s Weimar Republic bond holders were wiped out. In 1905 Japan defeated Russia, it weather the depression pretty well but by, 1945 it was in in ruins and so were Japanese bond holders. UK 1930s economic and military superpower, by the late 70s it was getting bail outs from the IMF before Thatcher took over. Long term bond holder (and at times England has offered 100 years bond) were ravaged by inflation . Soviet Union in 59 rising power and the leader in space race, by 1998 defaulted on its debt. One major difference between now and last century is it is easy to in-vision scenarios where the US government defaults but multinationals like Apple, GE, Google, Coke, P&G and their investors do just fine.

Well, luckily we don't have any of those imperialistic ambitions so, uhm... never mind.

Maybe the military drawdown is a good thing-- it might force the State Department to execute foreign policy without the DoD for a few years.

I wonder if Apple, GE, Google, Coke, or P&G would buy Treasuries.

[clifp]

Quote:

Originally Posted by Nords I wonder if Apple, GE, Google, Coke, or P&G would buy Treasuries.

I am pretty sure most have a big chunk in treasuries. Although how much is in long term treasuries is an interesting question.

Imagine what would happen if they worked with the Chinese to bring the treasury prices

[MichaelB]

A lot of the cash those corporations hold is outside the US. It is probably parked in money markets around Asia, Latin America and even Europe.

[ziggy29]

The interesting thing about tying Apple to Berkshire in this thread is that Buffett himself has often remarked about the unpredictable nature of technology and his inability to understand when a tech company has a "moat" like, say, Coke. (When Buffett has been quoted in the past as "not understanding" technology, I think this is the case, not that he doesn't know how to use a calculator. He doesn't know how to value tech companies for the very long term because of the mercurial nature of their business.)

A tech company is a lot more prone to become the next buggy whip maker than a diversified consumer products business. Apple's rise from the near-dead was astonishing, but some falls from grace have been astonishing too -- and with Mr. Jobs no longer at the helm, it remains to be seen whether AAPL's momentum can be sustained.

[Nords]

Quote:

Originally Posted by ziggy29 The interesting thing about tying Apple to Berkshire in this thread is that Buffett himself has often remarked about the unpredictable nature of technology and his inability to understand when a tech company has a "moat" like, say, Coke. (When Buffett has been quoted in the past as "not understanding" technology, I think this is the case, not that he doesn't know how to use a calculator. He doesn't know how to value tech companies for the very long term because of the mercurial nature of their business.)

Buffett now carries-- and uses-- a cell phone, but he claims that he didn't know how to retrieve voicemail from it.

This ignorance was rumored to have led to the Lehman bankruptcy because they returned his call while he was unavailable, and made him a really good offer which he didn't realize went to his voicemail. The reality is that even if he'd known how to retrieve the voicemail he would've passed on the offer, but it makes a great story.

I don't know what model of cell phone he's using these days, but I doubt he's using it to surf the Web or answer e-mail.