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.