Apple’s Dividend: a Windfall for Non-Shareholders
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I don't understand Apple's newly-announced dividend, nor the coverage I've seen so far, which seems to equate the dividend with “free money”, manna from heaven, as if two fundamental facts didn't exist:

  1. taking money from the company and giving to the stock holders reduces the value of the stock by exactly that amount, and
  2. for most stock holders, the dividend is a taxable event.

The end result is that most stock holders wind up with less because every quarter you must pay a tax on the mere act of owning the stock, a tax that you never had to pay before.

Why on earth would Apple do this to its shareholders?

Some folks like to have a steady income, sure, but such folks have always had the option to sell a few shares when they needed it, as they needed it, so the tax ramifications of ownership were always within each individual shareholder's control. Now it's not.

It's rare, but some companies offer a “shares in lieu of dividend” option such that you get additional shares instead of a cash dividend, which makes it a non-taxable event, and so a non-loss event. Unfortunately, Apple does not plan to offer this. (I know this because I sent an inquiry to their investor relations 20 minutes after the announcement, and surprisingly received a personal reply not long after.)

Today's announcement makes for a huge windfall for the IRS and other tax-collecting agencies around the world, and therefore, indirectly for much of the (first-)world's population.... most everyone except for Apple shareholders who foot the bill.

Basically, Apple just introduced a tax on being an Apple shareholder.
Why on earth would Apple do this?


All 9 comments so far, oldest first...

Indeed, when a company can’t find a better use for cash than to return it to shareholders, then a stock buy back is much more favorable to investors. Typically it is not tech companies that pay dividends as they have better investments to make favoring company growth. Companies that do pay dividends are usually those with a fixed asset base, such as utilities, that don’t rely on further investment for shareholder value.

That Apple doesn’t need the money to build assembly plants (such as Foxconn’s), suggests that they are very happy with the production model they have. This may signal to investors that the company won’t be undertaking an expensive and potentially risky, vertical integration strategy. Giant factories are expensive, and hard to scale down.

— comment by Paul on March 20th, 2012 at 2:29am JST (12 years ago) comment permalink

Interesting point. But wouldn’t issuing more shares (a la shares in lieu of dividend) dilute the value of all shares outstanding, effectively making every shareholders’ shares worth less, any way?

Thanks for sharing your thoughts on this, Jeffrey.

Taking money out to give as a dividend, or issuing more shares… both reduce the value of each share, but each shareholder is compensated by a dividend/grant in lockstep, so taxes aside, it’s neutral to each shareholder’s total value. In the end, the practical difference is that taxes are not “aside” for most shareholders. A dividend is essentially a forced sale. —Jeffrey

— comment by Andrew on March 20th, 2012 at 4:49am JST (12 years ago) comment permalink

You didn’t mention what was said in the reply. Nothing significant? And don’t most people want their stocks to pay dividends? Just asking.

They said in their reply that they would not do the stock-in-lieu-of-dividends thing. If you understand the ramifications of dividends, you either specifically want them or you specifically do not; the problem here is that most everyone who owns the stock bought it with the understanding that there wasn’t a dividend, and now suddenly having one forced on them completely dorks their tax planning. It would be bad enough for me if I were just in The States, but Apple effectively volunteered me to make an extra personal donation to Japan’s economic recovery, where dividends are taxed at the maximum rate. )-: —Jeffy

— comment by Grandma Friedl, Ohio, USA on March 20th, 2012 at 10:34am JST (12 years ago) comment permalink

I think the tax rate on dividends is 15%, so how is that a loss? That’s a lot lower than my tax rate; I’d be happy to earn an income on dividends and pay a mere 15% on it.

The tax rate on capital appreciation is zero. —Jeffrey

— comment by Dwayne on March 20th, 2012 at 12:46pm JST (12 years ago) comment permalink

Offering a dividend greatly expands the type of investor which can purchase Apple stock. Many institutional stocks, the largest single group of buyers, only acquire stocks which pay a dividend. The general sentiment is that Apple will not be able to keep up the pace of growth and as a result the stock will lose some share value. By expanding the pool of available buyers, they are hedging to create a new, highly attractive, group of buyers.

Personally I like the stock buyback plan.

— comment by Jeff on March 21st, 2012 at 3:07am JST (12 years ago) comment permalink

Tax rate on capital appreciation is zero until you sell of course, then I guess everyone, in most tax regimes would pay capital gains tax on the crystallised gain over and above any annual exemptions.

A share capitalisation issue would have been nice (a capital event deferred until sale of said shares ) – so the only reason I can think for the combined dividend and share buy back programme is because institutional investors have been pressurizing management (now SJ is up in the clouds) to get rid of the cash, increase the gearing and up the returns.

Not too much adverse critiscism of Apple in the London financial press, so the UK based big investors (ie our pension funds) don’t really have a problem with it…but I can really feel for that Japanese double tax hit you are going to have to swallow.

Have you thought about selling some stock prior to the “ex-Div” date to take advantage of your capital allowance (are there any in Japan? – doesn’t make much odds to you in the US I guess) at least enough to cover the extra income taxes bill…

Annie 🙁

I don’t have a problem with stocks yielding dividends, but with the sudden unilateral non-optional change that destroys everyone’s tax planning. It’s also amazing to me that this issue remains completely uncovered in the press I’ve seen… not one single mention of the huge sweeping impact. (“Huge” in the number of people it impacts, not “huge” in financial terms for me, but if you’ll excuse the pun, it’s the principle of the thing.) Yes I can sell a bit to cover the tax burden, but both the dividend and then the extra sale push all other income into a higher tax bracket in both countries, so the tax Apple imposes on its shareholders has a long and deep ripple effect. —Jeffrey

— comment by Annie in London on March 21st, 2012 at 9:25am JST (12 years ago) comment permalink

You could sell a bit to cover the tax burden? Really, I love your plugins, but maybe that is where you should stick to. If you get $1 in dividend, you might be taxed at 15%, so you save .15 cents and pay it at the end of the year on your taxes. You still walk away from the deal with $0.85. Heck even a 99% tax rate leaves you 0.01 better off than you were. The vast majority of non-rich investors would simply have their refund drop by a couple of bucks.

The dividend is part of the valuation of the stock. While the actual price might drop, in theory your additional value of the dividend should equal out, or maybe even be better, because the dividend makes the shares more valuable to investors. They have a legal responsibility to return value to their investors/stock holders and sitting on a large of a cash pile as they were could have developed in to legal challenges.

— comment by Kevin on March 23rd, 2012 at 6:33am JST (12 years ago) comment permalink

Jeff I have to agree with the others as the tax rate basically gives you a minimum of a 10% tax break (35k year single or 70k year joint). Yes you can keep the stock forever, but since no one lives forever a tax must be paid at some point and unless you are in low income bracket you will pay 15% and you won’t reap that money until you sell the stock in your old age and are too feeble for anything more than a P&S camera. Since the dividend is cash there is no real burden as long as you set-aside 15% of whatever you get and don’t go and blow it on a nice new D8OO or 5D iii. 🙂 It also makes the stock a lot more attractive to certain types of investors.

I’ll say again that I have no problem with the concept of dividends… it’s the sudden wild change that’s the problem, screwing up most everyone’s tax planning. Everyone’s situation is different and in some cases this “screw up” may well be a benefit, but in my case, dividends now are taxed at 50%, but if taken as capital gains later according to the plan I had when I acquired AAPL, they’ll be taxed at 20%. This does not please me. —Jeffrey

— comment by Skip from CT, USA on March 27th, 2012 at 12:00am JST (12 years ago) comment permalink

You wrote,

but both the dividend and then the extra sale push all other income into a higher tax bracket in both countries, so the tax Apple imposes on its shareholders has a long and deep ripple effect.

I don’t follow your logic. The tax rates are incremental. Thus, only the amount you go over the bracket is taxed at the higher amount. It is impossible for this event to effect the tax rate for other income other than itself.

Let’s say you earn $100,000 and that happens to be the top most level for the 20% bracket. If you received $10,000 in dividends on top of that, those dividends would then be taxed at the next level (28% for example). It would have no impact at all on the 100,000 that would still be taxed at 20%.

The point is that it’s taxed at the maximum level of your income and it wasn’t part of the plan, or, to look at it another way, it’s taxed at the minimum level but pushes other income into that maximum. Either way, it wasn’t part of the plan, and now it’s being forced on you as part of the plan, reducing the value of the stock by the same amount. It’s an unforced tax on something that is otherwise untaxed. And as I’ve said numerous times but no one seems to pay attention, dividends quickly push the tax rate to 50% where I live, so it’s quite the ripple in my plan. I’m sure I’m not alone. —Jeffrey

— comment by Jeff on March 27th, 2012 at 8:49am JST (12 years ago) comment permalink
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