Should Apple Become a Dividend Payer?

02/14/2012 6:30 am EST


Oliver Pursche

President, Gary Goldberg & Company, Inc.--Member FINRA/SIPC

In part one of’s interview with fund manager and advisor Oliver Pursche, he discussed how his firm, Gary Goldberg Financial Services, sees the European crisis unfolding. In part two, he talks about sectors to avoid, and whether Apple (AAPL) should begin paying a dividend.

Kate Stalter: In particular, European banks have gotten hit hard repeatedly over the past several months. But US banks until recently had been struggling, but have started to rally lately. What do you think of that sector?

Oliver Pursche: We’re not big fans of the financial sector. There is no question that they are undervalued and that they’re trading at what by all measures is historically low multiples to price-to-book value, price-to-earnings, price-to-cash flow…you name it.

However, given all the uncertainty, given the regulatory uncertainty, given the European debt crisis, and a lack of understanding what their real exposure is, no one’s really gotten a handle on that yet.

We don’t think that putting your money in financials is the best place to go. It’s a speculative move and certainly for aggressive investors who are trying to catch a falling knife in hopes of it rebounding—not the worst place to put it probably. But I think investors need to be very clear that it is still a risky investment in terms of the aggressiveness.

And let’s not forget, we’re in an election year here in the United States, we’re in an election year in France, we’re in an election year in Russia, we’re in election year in a number of other smaller nations. And politically speaking, picking on banks is always easy. We don’t know what changes are coming.

Kate Stalter: Another beaten-down sector that has been rallying lately is the homebuilders. Obviously, there are economic underpinnings in that sector as well. There has been just a lot of talk recently with the homebuilders’ index rallying, and many of the companies themselves. What’s your take on that particular industry?

Oliver Pursche: I think it is somewhat different than the financial sector. Both sectors were very beaten down, albeit for different reasons. Both have rallied somewhat. I think that the homebuilders have rallied partially on the improving US economic news and kind of cross-your-fingers-and-hope-you’re-right that the housing market is turning around.

From our perspective, there’s certainly still plenty of supply of homes on the market, and you see that in the data each and every month. But the downside risks to investing in the homebuilders is probably less than in the financial sector as a whole, because things are improving, and there’s certainly no regulatory risks.

On the contrary, every politician out there, whether you’re talking about the Republican slate that’s running in opposition to Barack Obama, or Barack Obama, the White House and his fellow Democrats in the House and Senate—everyone is talking about coming up with a fix for the housing problem. That’s likely to help homebuilders as opposed to hurt them. You have a very different picture in terms of regulatory environment there.

Kate Stalter: What should individual investors do as they see a beaten-down sector like homebuilders, where maybe there is some hope on the horizon? How would you advise investors to respond to this situation?

Oliver Pursche: Our approach, both inside the GMG Defensive Beta Fund (MPDAX) as well as our separately managed accounts at Gary Goldberg Financial Services, is to be very much fundamentally based.

So we wouldn’t just buy a sector as a whole, but we’re going to look at each and every company individually, look at their strengths, their weaknesses, their opportunities, and their threats—it’s what we call a SWOT analysis—and look at each company individually, and whether it makes sense to place your money there.

The question is always…not is it a good investment or bad investment, but is it the best place for me to put my money, based on all the information I have available?



Kate Stalter: Not necessarily jumping into to some kind of sector bet, when there might be some good news.

Oliver Pursche: Correct, and investors need to keep in mind, and since we’re talking about homebuilders, I’ll use the following example: Investors need to understand what they own.

So for example, if you buy the homebuilders index…there’s an ETF that tracks it [SPDR S&P Homebuilders ETF (XHB)]. But companies like Home Depot (HD) and Lowe’s (LOW) are part of that. Now, last time I checked, Home Depot and Lowe’s aren’t homebuilders. You can argue that they’re in the homebuilding and renovating business, but they’re really retailers.

So we want to take a look at and understand what we own, that’s very important: Understand the risks and the opportunities for each business. And we have to recognize that a company like Toll Brothers (TOL) is going to behave very, very differently and has a very different market than some of its competitors, and then you have to decide as an investor which one you think is going to do best.

Kate Stalter: Let’s turn to a not-so-beaten down asset class for now, what a friend of mine jokingly calls, "The asset class known as Apple (AAPL)."

We were talking about dividends a few minutes ago, and for a long time as Apple has been challenging and surpassing Exxon Mobil (XOM) in terms of market cap, there’s been a lot of chatter about whether or not the company should pay a dividend with its cash. What do you think about that, Oliver?

Oliver Pursche: This is something that we’ve talked about quite a bit. For full-disclosure purposes, we own Apple, both in our separate managed accounts as well as inside the GMG Defensive Beta Fund, so I do want to share that with investors.

Having said that, the bigger question really is: Should they pay a dividend? They have roughly $97 billion, nearly $100 billion in cash and cash equivalents, so of course there’s a temptation to say, "Hey, they should return some of that cash to their shareholders."

Here’s the problem: If we look at Intel (INTC) and Microsoft (MSFT) as kind of competitors, they both pay a dividend of roughly 3%. So at a 3% dividend, this would cost Apple roughly $12.25 billion to $12.5 billion a year in cash, and it is a growth stock.

From my perspective as a portfolio manager—and we’re not unanimous in this opinion here at our firm—it’s a growth company. And if the worst thing that ever happened to investors over the last five or ten years is to have stocks that have a similar return to Apple, they’d be in great shape.

Of course, that’s not how it works. It’s a little bit more complicated than that. But again, the question is, if you’re asking: Should there be a dividend? What’s the impact on their overall business? Is it going to affect the way that they’re able to innovate?

I mean, I have the Amazon (AMZN) Kindle, and my wife has the iPad. I like the Kindle better, but there is no question that the iPad is a much cooler machine.

The problem that Apple has in the long run, in my opinion, is that all of their revenues are new revenues. They have very little licensing revenue, so they’re essentially each quarter starting from scratch. At $450 per share, they’re still attractively valued in our opinion.

Paying a dividend to 3% or so and diminishing the cash, I think has more risks than benefits to investors. Keep in mind if the stock rises to $520 in the next two or three years, which is what many analysts predict, that’s returning $100 billion to investors, which is the same as the dividend.

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