Forbes writer William Baldwin says Apple’s stock buyout is Steve Jobs smart, and the annual dividend, set to start this summer, is just stupid.
Crafty bosses like Steve Jobs and Warren Buffett don’t let their companies declare dividends. That’s because these payouts get clobbered by taxes. At the moment the federal tax rate on dividends is 15%, but the rate is set to triple next year.
The smart way for a corporation to pay out loose cash is with share buybacks. So the $10 billion buyback part of Apple’s announcement today is Jobs-smart. The $10 billion annual dividend, to begin this summer, is dumb.
He continues: “Why is Apple initiating quarterly payouts? Because the mob wants it. Evidently the stock has been doing well in the past six months not just because iPhones are selling so well but because experts have been anticipating this big dividend announcement.
“But Steve Jobs was not one to let popular fashion, on Wall Street or elsewhere, tell him what to do.”
Warren Buffett took control of Berkshire Hathaway 47 years ago. The company hasn’t paid a dividend since then. The company generates a pile of cash from insurance and industrial operations. It’s going to pay that cash out via a share buyback program.
Baldwin says, “Bill Gates is not stupid. What’s he doing letting Microsoft pay dividends? It doesn’t cost him anything. He’s a full-time philanthropist now, and his giant foundation doesn’t incur income tax on the Microsoft dividends piling in.
“For the 2012 tax year, the federal rate on most cash dividends is 15% and so is the rate on long-term capital gains. But taxpaying shareholders are still better off when their corporations disburse cash via share buybacks rather than dividends. They owe tax only if they sell some shares, only to the extent they have gains on those shares and only if they don’t have a capital loss carryforward to absorb any gain.”
If there is no agreement between President Obama and Congress on an extension of the Bush tax cuts, next year the gap between dividends and long-term gains is destined to get wider. Dividends will be taxed as ordinary income at rates up to 39.6%. The rate on long-term gains goes to 20%.