Why Apple Shouldn't Pay Dividends

April 16, 2013 Pivotal Labs

Apple stocks were hovering around $550 a year ago. People loved it. And they bought in, despite knowing that part of the deal was that Apple didn’t pay dividends. They were all smiles while the stock continued to soar.

The story’s a bit different now. Apple is under pressure from stockholders to pay dividends; they’re upset that share prices fell, currently hovering around $400. They can pat themselves on the back by compensating for their losses with dividends.

Here’s the issue: per share, Apple is going to max out at around $10-20. Per share it’s not a lot – and certainly not enough to compensate for having the stock dip to that extent. 20/400 is 5%, which is comparable to other companies. Unfortunately, $20 * 939 million shares is quite a costly amount. What’s the opportunity cost of this cash?

Before long, mobile phones could have 8-core processors and 4GB of RAM. We have technology that’s extremely advanced: 22nm and 19nm processors from Intel. Yet with all this new muscular hardware, companies still have yet to optimize hardware for the software that runs on their phones.

The problems with ever-evolving hardware are numerous: it involves increased manufacturing costs, an increased battery capacity (and likely a physically larger battery), and less room for all the other components – thus, increased design expenses. It doesn’t have to be like this: the user experience can continue to improve, simply by optimizing current hardware for the software that is expected to run on it.

Take the example of Oracle’s database software and hardware. There’s nothing that runs Oracle as well as its own hardware: there are just so many intricacies (e.g., predictive caches, methods of querying results, and self-extinguishing hardware in case of internal combustion) that have been built into it that it is incomparable. Sure, it’s less powerful than many top-of-the-line systems today; that also means it’s easier and cheaper to maintain, and consumes less power.

Imagine if mobile devices were similarly calibrated. Batteries would last 24 hours instead of just eight. Prices could stay the same as cost savings kick in, which means that companies would make higher margins in the long run. Users wouldn’t notice performance issues when running 10-20 apps simultaneously. Perhaps the hardware houses caches that can load up what applications it predicts you will run next (based on what you’re running at the moment).

It would be nearly impossible to do this for Android devices because there are so many different types of hardware.

However, Apple may not find it so difficult: it only has the few variants of the iPhone, iPad, and iPod to execute on. If Apple wanted to go into research, rather than contract out to another manufacturer, they could design their own processors optimized for iOS.

Instead of spending a couple of billion dollars in dividends, they could use it to take the first step in optimizing: spend money just on optimizing hardware for software. Getting what currently requires four cores to be done on two cores would even out long-term costs. Apple wouldn’t need to pay for bigger batteries or spend money on fancier hardware for smooth performance.

When Apple first released the iPhone, it was a new standard altogether. However, other platforms and manufacturers have caught up.

When Apple chooses to optimize hardware for software, it will be setting a new standard again. All companies are left in the dust when the optimized hardware is released. It’s feasible for their ecosystem, and Apple could do it with their $137B in cash. (They made a decent $13.1B in profit purely off the iPhone 5.)

Apple is wasting cash if it chooses to divide it. Instead, Apple needs to put the money into continuing to building the innovative products that we’ve grown to love. The stock price will come back up, but only if we let it. Do you want some chump change, or do you want to change the world?

Connect with Rahul on LinkedIn.

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