Apple Inc. plans to tap $45 billion of its domestic cash over the next three years for dividends and stock buybacks.
The consumer tech giant, which famously keeps information about its moves close to the vest, made the announcement on Monday morning after months of speculation and pressure over its ever-increasing cash hoard. CFO Peter Oppenheimer said the company “elected a hybrid approach after a lot of analysis and thinking.”
The company plans to pay a quarterly $2.65-per-share dividend beginning this summer and repurchase up to $10 billion worth of stock over a three-year period. The buyback will begin with the company’s 2013 fiscal year, which starts September 30.
Apple CEO Tim Cook acknowledged earlier this year and again during this morning’s conference call with analysts that his company “has plenty of cash to run [its] business.” Indeed, Apple had nearly $98 billion in cash and cash equivalents at the end of 2011, fueling investor demand for some type of payout.
But is it in Apple’s best interest to cave to such requests? Gregory Milano, a frequent CFO contributor and CEO of advisory firm Fortuna Advisors, questions the move. Contrary to public perception, investors are unlikely to penalize companies of the caliber of Apple that are tightfisted with their cash. In a study Fortuna conducted last year, companies that held 15% of their total assets in cash or equivalents were likely to see lower total shareholder return — unless, like Apple, they experienced fast growth and high returns themselves. The thinking is that investors accept these successful companies’ large cash holdings as long as they appear to be using the excess cash productively.
If Apple were set on paying a dividend and authorizing a buyback, it should have gone beyond the “meager” dividend it’s offering, Milano suggests in an analysis shared with CFO. The dividend will give investors a 1.8% yield while Microsoft offers a 2.5% dividend yield. “Why be meager when you have $100 billion in cash?” he asks.
Milano also suggests that Apple should have considered a variable dividend tied to net income rather than the set amount it’s proposing to give up front. That way, if Apple’s net income drops in the near future, the news about a lower dividend won’t be received as negatively as it will if the company backs out of the $2.65-per-share quarterly dividend.
On Monday’s call, Apple’s executives reiterated that the company is investing to improve the business and will continue to do so, although Cook declined a request by an analyst to discuss any new product lines. Saying innovation is Apple’s highest objective, Cook said Apple will still put money toward research and development, capital expenditures, and new stores.
In the meantime — assuming the cachet of iPads and iPhones doesn’t wear off — Apple will continue to build up cash. This dividend marks Apple’s first in more than15 years. It will make Apple one of the highest dividend payers among U.S. companies, according to Oppenheimer. The buyback program will also limit future dilution of Apple’s stock from employee equity grants and an employee stock-repurchase program, he said.
The announcement may also rekindle the debate over corporate tax reform. Oppenheimer clarified that Apple will not be touching its cash stored outside the United States for its new investor programs, so that it can avoid any repatriation tax. Apple’s leaders have encouraged lawmakers and the Obama Administration to give companies an incentive to bring their so-called trapped cash back into the United States, and they’re not budging. “That’s our view and we’ve expressed it,” said Oppenheimer.