Apple announced that it would use part of the company's nearly $100 billion in cash to pay a dividend and complete a stock buyback.
These actions indicate that Apple can’t find suitable investment options and will just return cash to investors rather than invest in new growth opportunities.
Warren Buffett doesn’t pay a dividend to share holders of Berkshire Hathaway. He has said this is because he can put the money to better use than his investors could and he is obligated to deliver the best possible returns on cash.
With a dividend, Apple is in effect saying it can’t find a way to grow earnings any faster than it has. Apple's management seems to be indicating there are no game changing products on the drawing board and investors can get better returns investing elsewhere.
The buyback will not start immediately and should take place next year. If the Apple Board of Directors felt the stock was at a fair value today, they would have initiated the buyback immediately. By waiting, they are sending a signal that they think they will get a better price, which would be lower than the current market price, later.
Apple’s management seems to be saying there is nothing they can invest in that offers the earnings growth seen in the past and that the company’s stock is overvalued.
The dividend is important, and income investors should consider buying Apple when management thinks it’s a good deal and finally starts the buyback program. For now, Apple’s management is indicating the stock should be sold.
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