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Did the dividend decision affect Apple's share price?

One of the arguments made for the cause of the increase in Apple’s share price of late has been that dividends would attract more institutional investors and provide more liquidity to Apple’s shares. Can we test this argument?

We’re not dealing with speculation. The decision to start paying dividends was made three weeks ago. It makes sense to assume that this new information has been absorbed by the  markets and market participants have adjusted their positions. Funds that were previously restricted in their investment in Apple due to its lack of dividend policy, could now go ahead.

However, as the following chart shows, the share price climbed continuously before and after the dividend declaration of March 19th (shown in red). Trading patterns did not show unusual highs or lows. In fact, after March 19th the trading volume decreased on a weekly basis.

The other indicator is institutional holdings. The share of institutional investors as percentage of all outstanding shares did not increase significantly, and has been in an overall decline since late 2010.

But this lack of visible response to the decision should not be surprising.

Dividends are a tool to adjust capital structure based on optimal investment decisions. Dividends do not add value. The value of a company reflects the perceived net present value of all free, future cash flows. Whether the cash is in or out of the company is immaterial to its value. In either case the cash belongs to shareholders.

What the market is reflecting is fundamentals, not any change in liquidity due to “more buyers” available. For a long time the fundamentals were not accepted as sustainable. The best explanation for the rise in the share price is therefore that the company’s future is now becoming clearer and a cloud of doubt is being lifted.

  • http://www.aaplpain.com Travis Lewis

    Cash belongs to shareholders is an interesting topic.

    If I never owned AAPL but, buy the ex-div and sell after I collect the Div, was that really my money or am I a Raider?

    • beidaren

      on the ex-div day, your stock will drop, all things bing equal,  by an amount equal to the div amount. you will not be able to game the ex-div day consistentely.  if you don’t believe it, try it for a few times. 

      • http://www.aaplpain.com Travis Lewis

        Aware how it works. I was referring to removing value
        from AAPL. If AAPL has no Div and I bot and sold shares for a $2 profit in 1
        day, I did not remove any value from the company. If AAPL has a Div and I buy
        in for the day and stock drops $2.65 the next day, say I walk for $0 net gain.
        But 1 thing changed. I just removed $2.65 in cash per share from AAPL. Was that
        my cash to remove or is this AAPL’s cash and they let me remove it?

      • Simon Hibbs

        Shareholder’s total holdings in terms of AAPL stock and cash together have not changed. It’s just that $2.65 per share has been transferred from their holdings in AAPL stock to their holdings in cash. So yes AAPL is less valuable, which is why their stock fell in value by $2.65 pre share. Which is why you weren’t able to extract any value from your purchase and subsequent sale of stock.

    • iphoned

      Revenue drop on X-dividend date makes sense only when cash has been properly factored into the stock price.

      If it hasn’t, as is clearly the case here, the stock drop on the X-dividend date will merely be Mr Market’s nonsensical reduction in the value of future earnings.

  • http://wmilliken.livejournal.com/ Walter Milliken

    I’m not sure I buy the conclusion here — the slope on the graph seems to increase around the 5th week of 2012, which is right around the time that Tim Cook spoke at the Goldman Sachs conference (Feb. 14). While the dividend wasn’t a foregone conclusion at that point, the speculation about one coming soon did seem to jump to new levels around then.

    And then there’s the conspiracy theory reported by PED on Fortune’s Apple 2.0 blog: http://tech.fortune.cnn.com/2012/02/18/apples-40-rise-and-fall-was-goldman-sachs-behind-it/that suggests Apple started spiking up the week before the conference, possibly due to insider knowledge that Cook was going to speak….On the other hand, I agree that the level of uncertainty about Apple seems to have dropped in recent months, and this is certainly a plausible factor in the price. The Tim Cook appearance on 2/14 likely affected confidence as well, so it’s hard to tell what the market was responding to there, if that was indeed one of the catalysts for the price since then.

  • Henry

    Nice breakdown. Two additional thoughts-
    1. The dividend was widely expected and hence if we take the dividend-boosts-Apple-stock-price story seriously (which I don’t), much of the volume would have occurred leading up to the announcement.2. I’m not sure I agree entirely with your statement: “Dividends do not add value. The value of a company reflects the perceived net present value of all free, future cash flows. Whether the cash is in or out of the company is immaterial to its value. In either case the cash belongs to shareholders.” My sense is that the question really should be framed as whether Apple or instead the shareholders could use the cash more productively. It’s tempting to think Apple would, but really it wasn’t using most of the cash, so actually probably not. Perhaps it just comes down to tax treatment and bringing in dividend investors.

    Again, sorry if this is obvious (and I think you’ve made these points in previous posts). If I’m missing something, I’d love to know. I agree entirely with your conclusion that “For a long time the fundamentals were not accepted as sustainable. The best explanation for the rise in the share price is therefore that the company’s future is now becoming clearer and a cloud of doubt is being lifted.”

  • iphoned

     >>Dividends do not add value.
    Mathematically they don’t.  In real life they do.  I mean, Ben Graham new and articulated way back in the 1940 Securities Analysis now and why dividend paying companies trade at higher multiples than the non-paying once.

    But I suppose, once one takes a position, one can go through any length to justify it.

  • aeolist

    You stated: Whether the cash is in or out of the company is immaterial to its value.

    This is incorrect. If a company is holding excess cash that it cannot reinvest at its cost of capital the shareholders should demand a dividend so that they can reinvest the proceeds in other companies that will (hopefully) earn at least the shareholders cost of capital. If the company fails to do so its share price will fall. 

    You fail to consider that a company is a portfolio of assets each with different rates of return. The return on cash is almost always lower than the cost of capital for both the company and the shareholders (these are different, by the way) and tends to drag down the portfolio return and reduce future cash flows and therefore share price. You also need to consider that shareholders usually reinvest dividends in the shares of companies at returns superior to cash returns. 

    Of course the dividend decision is difficult for companies. Determining the future cash needs of the business, giving consideration to tax effects (corporate and shareholder), and balancing the interests of different classes of shareholders makes the dividend decision difficult.

    • iphoned

      >>Of course the dividend decision is difficult for companies.
      What self-serving management woud voluntarily give up the cash under their control?  I mean it is clearly in their self-interests, to sit on as much as possible, because it enhances job security and is least risky for the “company”.   Kind of like high-paying executive salaries – why not if one can get a way with it?

      From the owner’s perspective, things look different.  Just imagine a single private Apple owner with the clear power to excersize such ownership.  He/she would never allow such monstrosity of $100b tied up seemingly forever at zero rates of return.

    • http://twitter.com/disc1979 Dirk Schmidt

      Sorry for late reply:
      – Shareholders can adjust their risk/return ratio by leveraging on shareholders level.- The cost of capital of cash is equal to its return. Betas are additive.
      – Cash at hand does not reduce future cash flow.

  • MOD

    The most interesting graph is that the stock rose while institutional holdings fell. This means individual investors are not just making up the difference, but boosting it to new heights.

    If you can find odd lot trading data (less than 100 shares), that would confirm small investors trading the stock.

  • David Weintraub

    Is it possible that there was a rise in Apple’s share price pre-divident announcement because there had been so much talk of Apple offering a dividend, and it looked like Apple was seriously considering it? I remember the price of Chrysler skyrocketing because people merely heard rumors that Chrysler might with Daimler Benz.

  • http://twitter.com/echotoall echotoall

    “Dividends do not add value. The value of a company reflects the perceived net present value of all free, future cash flows.”

    Ultimately I agree with this statement. But throughout 2011 AAPL saw a tremendous multiple contraction despite growing earnings and free cash flow at a +50% clip. (And this was before the European bank run threat.) Throughout 2011 it suffered ‘those who wanted to own it, own it. Those who didn’t needed a reason’. If it offered a reason for more funds to own the stock (dividend funds), I do not think the multiple contraction would have been so severe. 

    IMO, if Apple sees a hiccup this quarter, the hit should be minimal because of the increase funds allowed to buy it. (Funds that were not available to in Oct 2011.)

    I think there is a legitimacy of a well though out financial engineering of a stock, after a stock reaches a critical mass of ownership.

    • Westechm

      In the last few months Apple has been hyped and expectations have increased greatly.  If there is a hiccup in this quarter I believe that the stock will drop similar to what it did in FQ4, 2011.

      • http://www.asymco.com Horace Dediu

        How do you measure hyping?

      • Westechm

        Many of the professional analysts have been skeptical as to whether Apple could continue their spectacular growth.  The skepticism seemed to abate to some extent last year as reflected in the more bullish predictions for the third quarter 2011.  When the earnings disappointed there was a relatively sharp feel off and some expressed the opinion that the balloon was bursting.  

        The outstanding performance in the following quarter caused a big flip in sentiment.  Maybe Apple is for real.  This is clear when you look at the earnings predictions, short and long.  It seems to me that the professional analysts are trying to out-do each other in raising their outlook.  $1,000 a share?  That’s exuberant.  Irrational? Not yet, in my opinion, but approaching it.

        If you want a quantitative measurement I think comparisons of how many Pros are bullish would help,as would graphs of how their outlook has changes with time should do.  You could also count the number of favorable articles and blog post.  Tough to do.

        Expectations are very high.  Even a minor disappointment create a big sell off.

  • Westechm

    The dividend is sort of a fake out.  Apple has a ton of cash, and people have been saying that they should return it to the stock holders.  In the quarter that they start the pay out, the blip on the cash flow line will be minimal and the cash balance will continue to grow at an obscene rate.  When the happens the stockholders will feel that they have been taken and that the dividend is only a token payment.

    This may be of less concern to the value funds than to individual investors.

    • JoeyBill

      “Feel they have been taken”? I don’t get that. If you want some sort of pay out, just realize your gains by selling a few shares. But then your money’s in cash and going nowhere, instead of in a company where it could be generating more money.

      Apple will always keep around a ton of cash since, as a constant innovator, they need to weather storms and not be 90 days from bankruptcy like in the past. As an investor, I prefer them to have a cash cushion and not have to take on debt.

      If investors feel like they’re being taken, they must be thinking the glass is half empty. Was there some alternative investment they would have preferred?

      • Westechm

        As one looks  at Apple’s pile of cash and the rate that it is growing there is a natural feeling that investors have that the Company should share this with the stockholders.  I believe that the amount of cash will continue to grow at a very high rate.  The natural reaction would be to feel that the dividend is way too small and that the company has done the least they could to ease the pressure.  This really applies mainly to the individual investor.

        Personally, I am not a believer in dividends, but I have learned not to second guess Apple.

  • torifile

    My sense all along has been that people are selling stock as a way to capitalize on the growth in the stock’s price. Until the dividend, that was the only way to realize any actual profit on the stock. After the dividend, one can hold the stock and still make money. At least that’s the case for people like me who are long AAPL. I haven’t sold a share in many years and until I start getting a dividend check, that’s money I don’t have.

    The other point is that trading volume has decreased since the announcement. I believe that this is a function of what I stated above. People no longer need to sell in order to make money, reducing the stock’s volatility. I believe that a decrease in volatility is a good thing all around and the dividend is what’s making that possible. At least, IMHO. 

  • KirkBurgess

    I’m wondering about the decline in institutional ownership, is it possible that this decline is actually not from institutions selling, but from new shares being listed from staff compensation? So institutional ownership may not have changed, but it declined as a percentage due to more shares outstanding.

    Obviously this will cease to happen once apples share buyback starts to eliminate this addition.

  • Secular_Investor

    “However, as the following chart shows, the share price climbed continuously before and after the dividend declaration of March 19th (shown in red). ”
    In fact many people took Tim Cook’s remarks at the Goldman Sachs conference in February as a clear signal that Apple would start to distribute surplus cash either as dividends or share buy back There have ben many reports that institutions were buying in anticipation of the dividend announcement. Also many traders would have been buying on the rumour, selling on the fact, dampening the effect of the actual announcement.

    Also Horace, where did you get the institutional holdings data? Is  real time? Is not a lot of this information delayed until fund managers make their periodic declarations?

    However, I agree that a lot of the surge in share price comes from investors gaining  a better understanding and appreciation of Apple’s exceptionally strong fundamentals. Part of this was a result of Last quarter’s surge in revenue and earnings, far exceeding analysts’ expectations. 

    But I think credit also goes to Tim Cook who has been at pains to counter the myth of “Law of Large Numbers” by explaining both at the earnings call and at the Goldman conference that Apple still has huge headroom to grow.

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