Apple Shares the Wealth
Apple is planning to hand out dividends to AAPL shareholders for the first time in years. It's also winding up for a large stock buyback. Some investors have long been clamoring for Apple to send some of its massive cash stockpile back their way. The decision will keep them happy, but it could also pose a competitive risk.
03/19/12 11:24 AM PT
Apple will soon resume paying dividends to its shareholders, a practice it had abandoned years ago. The company will begin paying a quarterly dividend of US$2.65 per share in Q4 fiscal 2012, which begins July 1.
Apple will also buy back $10 billion worth of shares over three years starting fiscal 2013, which begins Sept. 30. This is to neutralize the impact of dilution from future employee equity grants and employee stock purchase programs, the company said.
"What else can it do with its cash?" asked Paul McWilliams, editor of Next Inning Technology. "Beyond the fact that investors are attracted to dividend-paying stocks, if Apple were to substantially lower its cash supply, it would trade at a lower stock price, and get less attention from regulators and politicians around the world."
Stock buybacks are generally seen as a way for companies to increase their value to investors.
"Apple's integrity in stating that its buyback program is to offset its stock-based compensation programs is worth highlighting," McWilliams told MacNewsWorld. "Most companies portray this as a benefit to shareholders without discussing its effect on stock dilution."
However, the buyback "is like anticipating Japan's attack on Pearl Harbor by cutting back on the military," Rob Enderle, principal analyst at the Enderle Group, remarked. "It will improve short-term stock performance at the cost of long-term strategic resources."
Apple did not respond to our request for comment for this story.
The Effect of Apple's Loosened Purse-Strings
Apple will spend about $45 billion of its $100 billion war chest on dividends, share repurchases and cash used to settle vesting restricted stock units (RSUs).
The company uses RSUs as stock-based compensation for its employees.
Accrued dividends on unvested RSUs are paid to holders once the RSUs vest. Apple has 17.7 million unvested RSUs now. These provide its employees with about $200 million a year on an aggregate basis, McWilliams estimates.
The dividends alone will cost Apple about $10 billion a year. They represent a yield of 1.8 percent on AAPL's Friday closing share price of $585.57.
Apple's announcement of the dividend payout came as little surprise, having been predicted by several analysts in recent weeks.
The company stopped paying dividends in 1995, around the same time the company's cofounder Steve Jobs retuned as CEO, a position he held until shortly before his death last year. Over the past year or so, calls from investors for Apple to resume paying dividends increased as its share value and cash stockpile skyrocketed.
Could Cupertino Do More?
Apple's dividend of 1.8 percent is small in comparison to the three percent companies such as Intel and Qualcomm pay out, and McWilliams argued that the company can, and should, pay more.
However, there's also a reason for Cupertino's caution. About 65 percent of its cash is invested outside of the United States, and current tax laws make it easier for the company to keep that money outside U.S. borders, McWilliams said.
"If Apple repatriates the money to pay dividends or buy back stock or do anything else, it gets whacked by 35 percent in federal taxes as well as state taxes, bringing the total to more than 40 percent," McWilliams explained.
Further, Apple needs funds at hand because "its strategic future has a number of massive wars tied to its competition with Google, intellectual property litigation and Windows 8," Enderle told MacNewsWorld.
"Most of Apple's existing investors didn't invest in Apple for dividends but for strategic growth," Enderle stated. "They might be upset with this change [in the dividends policy] if Apple finds itself strapped for resources in a few years."
The Ins and Outs of Cash Buybacks
One possible reason for Apple's plan to buy back its shares is that this would lower its cash supply and make it a less tempting target for regulators.
"Apple's biggest threat now is not Google, it's governments worldwide," McWilliams said. "Like Willie Sutton, who said he robs banks because that's where the money is, politicians around the world look for ways to extract money and gravitate to where the money is."
The stock buyback and dividend payout "are tactical moves and not uncommon, because they tend to improve executive compensation tied to stock price but they do so at the cost of the company's ability to wage war in the marketplace," Enderle said. "Given Apple's need to keep hits like the iPad coming and phase out older products like the iPod, [these payments] weaken the company strategically."