Apple's sleek products clutter my desk and I love them. I no longer have the same affection for the company.
As an investor (or would-be investor – I own no Apple shares), I think Apple is about to enter a thrill-free era as a "mature" tech giant and that its new obsession with share buybacks will all but guarantee its status as a future flat-liner. Worse, Apple's Irish tax avoidance scheme, and CEO Tim Cook's defence of it, was not just baffling to me so much as immoral. Just because you can trade jobs in some countries for obscenely low tax rates doesn't mean you should.
Taxing issues: When the Beatles wrote Taxman (If you get too cold, I'll tax the heat/If you take a walk, I'll tax your feet), they obviously were not inspired by Ireland, which would evolve into a tax haven apparently willing to cut clandestine deals for the biggest, most glamorous foreign companies.
Enter Apple, with alacrity.
This week, the European Union's unflinching competition commissioner, Margrethe Vestager, told Ireland it should levy €13-billion ($19-billion) in taxes on Apple. Her argument was that the sweetheart tax deals struck in 1991 and 2007 (long before Mr. Cook replaced Steve Jobs) saved the company vast fortunes, as a tax rate of 1 per cent or less just might do. What's more, they were deals that were not available to other companies; therefore, they amounted to illegal state aid under EU rules. "If my effective tax rate would be 0.05 per cent, falling to 0.005, I would have felt that maybe I should have a second look at my tax bill," she said, using figures that were not made up.
Mr. Cook reacted as if he had just learned his senior executives were closet BlackBerry users. In an open letter, he complained that the meddlers in Brussels "launched an effort to rewrite Apple's history in Europe, ignore Ireland's tax laws and upend the international tax system in the process," which is rather to miss several points. (On Thursday, he suggested on Irish radio that he would repatriate about $5-billion (U.S.) of profits to the United States, where they would be subject to a 35-per-cent tax rate.) The first point is that, as a general rule, companies should pay taxes where they create value and report sales. Apple has a big Irish presence – it has an iMac factory in Cork with more than 4,000 employees.
The second is that the sweetheart deal was bound to get discovered and blow up in Apple's face, so there was no point in getting all righteous while warning that job creation in Europe would be at risk if Ms. Vestager's case, which Apple will appeal, goes against the company.
The third is that tax isn't really the issue; this issue is allegedly illegal state aid in the form of negligible tax rates. You can bet that if an Apple tech rival in Ireland were given billions of euros in grants to set up a laptop factory, Mr. Cook would shout until his gums bled. In Ms. Vestager's view, there is no difference between extremely low tax rates and extremely high amounts of freebie state aid. Good point.
Growing pains: There's a lot of debate over whether Apple is still a growth stock, or even if it is a true tech stock as opposed to a consumer staple stock, one dominated by the iPhone – that is, a product that is essentially the same as any other high-end smartphone.
The best evidence that Apple is evolving into an old-fashioned value play – anathema in growth-obsessed Silicon Valley – came in the spring when Warren Buffett bit into the previously forbidden fruit; his investment, through Berkshire Hathaway, is now worth about $1.5-billion. Mr. Buffett generally shies away from tech plays. He likes companies that throw off a lot of cash, are mature, are market leaders and are capable of returning a lot of capital to shareholders through dividend hikes and share buybacks (more on buybacks in a moment).
For him, Apple ticked all the boxes.
Apple's growth is indeed waning. Over the next five years, analysts expect 8.7-per-cent annual earnings growth, according to a survey by zacks.com. Not bad, but it's a long way from the 30-per-cent growth rates seen in the past five years. Sales of the iPhone are in decline – they dropped 7.7 per cent in the second quarter, year on year – and the gadget's market share is dropping too. Apple watch sales have been falling rapidly.
The consensus growth rate could prove optimistic if the iPhone profit margins shrink in the face of relentless, look-a-like competition and no killer new product is launched. The last gotta-own-it device was the iPhone, which hit the market in 2007. The gimmicky Apple Watch doesn't count, sorry.
Beware share buybacks: If Mr. Buffett's Apple investment marked an end of an era, so did Apple's monster share buyback program, launched in 2012, the year after Mr. Cook became CEO. At last count, the program had bought back $127-billion of shares, with another $48-billion to go, taking it to $175-billion. That's equivalent to 30 per cent of Apple's market value.
Share buybacks may be a dream come true for short-term shareholders, but not for long-term shareholders and stakeholders in general. A company that spends fortunes on buybacks by definition spends less on innovation, strategic acquisitions and programs such as employee education aimed at enhancing R&D success.
To be sure, Apple did buybacks in the Steve Jobs era, but they were small and never a priority. Mr. Jobs was obsessed with making the best products, not pleasing shareholders. Of course, those products were so successful that shareholders got rich. The buyback surge provides more evidence that Apple's best days are behind it. Sadly, Apple now seems more interested in being a shareholders' darling than in sustaining innovation that can change the world.