Why Apple Should Have Inverted Its Dividend and Buyback Priorities

24/7 Wall St. does not want to only look at things one bad side here. After all, Apple is the world’s largest company by market cap. Apple is also the most profitable American company. The overwhelming majority of Apple’s $195 billion or so in cash and cash equivalents is not domiciled in the United States, which might make it very difficult to get that cash paid in dividends in a tax-efficient manner.

A BofA Merrill Lynch report did address one of the issues that may be keeping Apple from getting too much cash in the hands of its shareholders. That is also the notion that Apple’s cash is dominantly held outside of the United States. Their report said:

Apple’s balance sheet remains strong with $195 billion in cash and marketable securities at the end of the Dec quarter, of which over $171 billion is offshore.

Moody’s also addressed the dividend hike and share buyback, with no change in Apple’s ratings. The credit ratings agency said:

Apple Inc.’s announced $70 billion extension of its shareholder return program does not impact the company’s ratings or liquidity. The refresh of the program, through March 2017, supersedes the current $130 billion capital return program that was set to expire in December 2015, bringing the total dividend and stock buyback authorization to $200 billion since its inception in fiscal 2013. Moody’s expects the company to continue generating very strong cash flow from operations which will give the company the ample resources to fund its announced shareholder return program without endangering its credit rating.

S&P Capital IQ kept its hold rating in place on Apple. On the buyback and dividend plan, the firm said:

We are encouraged by Apple’s $200 billion capital allocation strategy.

Apple shares closed down 1.6% at $130.56 on Tuesday on 118 million shares. That is more than two-times normal trading volume, but investors should consider that the high of the day was $134.54 — and that was an all-time high. What this means is that after investors fully digested the news, they sold Apple off almost $4.00 from peak to close during the same day — and they sold it off to the point that shares closed in the red.

Is it fair to ask if maybe Tim Cook should have spent more effort getting a higher dividend rather than such an emphasis on the massive stock buyback plan?

The main reason that 24/7 Wall St. prefers dividends is that dividends say something different about a company. Stock buybacks are generally to keep the number of total shares from growing (or to shrink the float), or they are management’s effort after sell-offs to say that the stock is too cheap. Dividends being raised are meant to signal that a company has confidence in its earnings for years and years into the future.

ALSO READ: Is Starbucks Really Worth 20% More?

There is no doubt that a $200 billion capital return plan is more than impressive. This plan might have just been more impressive if it was more focused on dividends rather than mostly on buybacks.

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