Time’s taken a bite out of Apple’s appeal
Apple Inc. appears to be throwing in the towel as one of history’s greatest growth companies.
In deciding to return $100 billion (U.S.) in surplus cash to shareholders, Apple is giving in to pressure from a Wall Street that is fretting over Apple’s slowing pace of sales growth and the heightened competition it faces. Apple shares have already dropped 37 per cent from their September 2012 peak. In recent months, even shares in beleaguered BlackBerry, up about 13 per cent over the past 12 months, have outperformed Apple.
How considerable was the pressure on Apple to restore its reputation with the Street? The trigger might have been news that one of the most prominent funds at Fidelity Investments, the world’s biggest mutual fund operator, had cut its Apple holdings by 12 per cent in the first quarter. Or it might have been the revelation as spring approached that some 870 other institutional investors had likewise reduced their exposure to Apple, while still others had evicted the Cupertino, Calif., company from their portfolios altogether.
Under Steve Jobs, who returned in 1997 to the firm he co-founded, Apple rolled out a parade of gamechanging products for which there may be no equivalent in modern times. The iMac, the iPod, iTunes, the iPhone and the iPad are among the most prominent Apple breakthroughs, by which all things Apple became “aspirational.” This cultlike aura enabled Jobs to price his gadgets at a premium. As a result, Apple is now sitting on an accumulated $145 billion in spare cash, a nest egg that exceeds the entire market value of more than threequarters of all S&P 500 companies.
Apple’s “corporate equivalent of shock and awe,” as veteran U.S. business analyst Dan Gross describes the $100-billion payout, reinforces the sentiment I wrote of at the time of Jobs’ passing in 2011: namely, that Apple’s best days are likely behind it. And Gross isn’t alone in discerning a cynical twist to what Apple is doing with the funds it’s offloading.
Apple’s remarkable string of new-product blockbusters coincided with the dawn of the Information Age, the excitement of which ensured brisk sales of almost every new product Apple pushed out its door. But that exhilaration is fading as mobile devices take on the generic, commodity-like attributes of household appliances. Apple’s continued ability to dazzle is a dodgy bet, given the unpredictable role of timing in new-product development, and of luck in R&D. Just ask the pharmaceutical giants that have reaped so few “miracle” drugs from their billions of dollars in annual R&D spending.
Apple also has hot and heavy competition now, conspicuously from South Korea’s Samsung Electronics Co. Ltd. Actually, there are many rivals, not a few of them start-ups, offering the same or better functionality as Apple devices, and at lower prices. Apple’s lavish profit margin of 37 per cent in its latest quarter might be its high-water mark, as the company is forced to cut prices to retain market share. In a sign of things to come, Apple recently cut the price of its MacBook Pro by almost 12 per cent, opting to price its muchanticipated laptop at $1,499. Double-digit revenue growth for Apple’s flagship products is destined to become a fond memory: iPhone sales in the U.S. were up just 6.5 per cent year-over-year in the latest quarter, and Mac revenues actually fell. Last year, Apple’s global smartphone market share dropped steeply, from 23 per cent to 14.6 per cent, while Samsung’s smartphone share jumped to 31.3 per cent. Apple’s share of the global tablet market plunged more than 30 per cent last year, a victim of Samsung’s lower prices. By committing itself to paying out a minimum of $30 billion to shareholders each year through 2015 — a practice it’s likely to continue thereafter to retain investor loyalty — the character of Apple will have to change for the first time in its history. Apple simply can’t sustain that level of payouts — a whopping 7.5 per cent yield, more typical of staid utilities — without becoming a conservative, risk-averse firm. As a slow-growth tech company — an oxymoron on Wall Street — Apple is becoming that least attractive of money managers’ picks. Like Microsoft, whose shares have been “dead money” for ages (its stock has underperformed the S&P 500 by four points over the past five years), Apple still carries the investor risk of a tech firm but without the dynamic growth potential to justify that risk. There’s also a socially unattractive aspect to this ostensibly internal matter between Apple and its shareholders.
America’s central bank, the Federal Reserve Board, has been working overtime for years to keep interest rates negligible in order to induce corporations to borrow cheap money to stimulate an anaemic economy. But corporations hoarding a record $1.8 trillion have instead focused on closing plants, offshoring and cutting jobs, and using the savings to boost dividends, share buybacks and topmanagement pay — stimulating only the famous 1 per cent.
Apple has more than two-thirds of its surplus-cash hoard parked offshore. It seeks to avoid a tax bite of as much as $35 billion if it were to bring that money home. Instead, this week, Apple borrowed $17 billion in the bond market at the deep-discount rates created by the Fed’s actions to make good on its payout promise. A clever tax dodge, to be sure, but not a stimulus for an economy in which median household incomes have dropped in the Great Recession.
“What Apple is doing is all too typical” of corporate America, writes Washington Post public policy analyst Neil Irwin. “It is taking advantage of low rates to funnel money to shareholders in a bit of financial engineering, rather than triggering new investment.”
Jobs’ winning slogan for Apple was “Think different.” Doing so would mean raising the pay for the 42,000 people employed at 402 Apple Stores, most stuck in nearminimum wage jobs. And no longer relying for product assembly on the overworked employees of Taiwan-based Foxconn, whose practices first came to light with reports of iPhone assemblers taking their own lives.
Hiving off a portion of that $100 billion reaped from consumers and distributing it to front-line employees, self-employed software writers, IT contractors and others among the 99 per cent would be consistent with Jobs’ exhortation to “punch a hole in the universe.” Absent their imminent windfall, Apple investors have already been amply rewarded with a 7,927 per cent gain in Apple’s share price since the Jobs era began. dolive@thestar.ca