AAPL investors should thank Apple for keeping dividends relatively low

Gary Smith for MarketWatch:

It’s a problem most companies would be thrilled to have — tens of billions of dollars in free cash flow that can be invested or distributed to shareholders.

Apple has this happy problem, and one of its solutions has been to give its shareholders some of the cash flow. In fiscal 2019, Apple paid $14.1 billion in dividends and spent $67.1 billion buying back its stock. Many billions more are on the horizon…

True, a dividend puts cash in shareholders’ bank accounts, but shareholders can always get cash by selling some of their shares — in essence, a shareholder-determined dividend policy. With today’s free commissions, selling shares is as easy as cashing dividend checks… [but] share repurchases are generally better than dividends…

As is often the case, taxes are the deal breaker — making repurchases far preferable to dividends. The federal government taxes qualified dividends at the same rate as long-term capital gains (0%, 15%, or 20%, depending on filing status and taxable income), while ordinary dividends are taxed at the higher income tax rates that apply to wages, interest and other ordinary income. This tax distinction awards buybacks a clear advantage over dividends.

MacDailyNews Take: As long as Apple is so undervalued, the company should buy back shares, since those shares are on sale. Shareholders can at any time choose to take some cash at their own discretion and at lower tax rates by simply selling shares. Apple’s dividend rate will, of course, go up over time, but the company is right to keep them relatively low versus share repurchases.

3 Comments

  1. That’s a somewhat nonsense article. Yes, I’ve always said that dividends cab be equaled by selling shares. We are now in a good position for that, as after the dramatic drop in share price late 2018 and early 2019, due to Trump’s crazy trade actions, the market has shrugged most of that off, and the market has rebounded to new highs. Apple shrugged off the drop from $233 down to $143.

    If you used the articles’ policy of selling off during the long period between the $233 pricing and the time it came back to that price, you would have lost considerably. It would have been a bad idea to follow. In that time, dividends would have been a much better financial path to have.

    The big problem here is the bad policy Apple is following in buying back so many shares. There has never been any evidence, despite so many in the financial industry believing it, that share buybacks increase share prices in any significant way. Apple has thrown about $240 billion away with share buybacks. In addition, they have about $120 billion in debt from borrowing to help paying for them.

    When we think of what they could have done with that money instead, it’s staggering! Some could have been used in increasing the dividend. That dividend is now, due to the share price increase, around a mere 1%. There’s really no excuse for that. Apple should increase that dividend significantly this year. Last year was embarrassing, with Apple throwing us a bone with a miserly 5% increase. But had huge share buybacks.

    This year, they should reverse that, and increase the dividends substantially.

  2. MarketWatch should know better. IRS regards Apple dividends as qualified dividends (if you have held the shares for 60 days), and the tax rate on qualified dividends is the same as the long-term capital gains rate.

    Of course you pay the tax (at 5, 10 or 20 percent) on the full amount of the qualified dividend, whereas the capital gains tax on the shares you might have sold is only on the profit. (But for many AAPL investors, the profit is almost the same as the sale price.)

    Definition of qualified dividends: https://www.fool.com/knowledge-center/qualified-dividends-vs-ordinary-dividends.aspx

  3. (Corrected tax rates)

    MarketWatch should know better. IRS regards Apple dividends as qualified dividends (if you have held the shares for 60 days), and the tax rate on qualified dividends is the same as the long-term capital gains rate.

    Of course you pay the tax (at 0, 15 or 20 percent) on the full amount of the qualified dividend, whereas the capital gains tax on the shares you might have sold is only on the profit. (But for many AAPL investors, the profit is almost the same as the sale price.)

    Definition of qualified dividends: https://www.fool.com/knowledge-center/qualified-dividends-vs-ordinary-dividends.aspx

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