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yARN: Apple gives back - within reason

yARN: Apple gives back - within reason

The change isn’t going to reduce the pile of cash

So Apple has finally decided to return some of its massive pile of cash to stockholders. The company announced this week that it would start paying a regular quarterly dividend of $US2.65 per share, beginning in its fourth fiscal quarter of 2012 (July-September).

The news went down well with investors - or perhaps traders - who pushed the shares to a record closing price of $US601.10 that day. On Tuesday (US time) it closed even higher at $US605.96, though it slipped back to $US602.50 on Wednesday.

Such a positive reaction seems curious at this distance - especially in the light of the traditional sentiment that growing companies don’t pay dividends because they can do something better (ie achieve additional growth, perhaps through acquisitions) with the money - but it seems that a yield of less than 2 per cent can suddenly make a stock more attractive.

One suggestion is that paying a modest dividend will allow investment funds that are restricted to putting money into dividend-paying stocks to participate in Apple’s (hopefully) continuing growth.

Apple has become such a massive cash-generating machine thanks to blossoming sales and fat margins that it could no longer justify holding so much in cash and securities (approaching $US100 billion) as a way to stitch up advantageous supply deals or as a war chest for strategic acquisitions.

When it comes down to it, if investors want money in the bank, they can put their own money in their own accounts. There have been rumblings about possible lawsuits to push the company into either using or disgorging some of these funds.

Apple also announced plans to buy back $US10 billion of its own shares, starting in the first fiscal quarter of 2013 (the fourth quarter of calendar 2012). The objective is to offset the otherwise diluting effect of employee stock grants and purchases.

All told, CFO Peter Oppenheimer said the two changes would involve “approximately $US45 billion of domestic cash in the first three years of our programs,” (ie, the company won’t need to repatriate overseas earnings, which under current rules would have adverse tax implications). That sounds a lot, but Apple’s retained earnings increased by nearly $US13 billion over the quarter ending December 2011. That was a record quarter, but the massive first-weekend sales of the new iPad suggest Apple’s growth is not yet over.

Spread over those three years, $US45 billion is $US3.75 billion per quarter. So the change isn’t going to reduce the pile of cash, it just won’t grow as quickly as it otherwise would. Apple will still have the wherewithal to acquire pretty much any company it chooses.

So why is Apple so liquid? My theory, for what it’s worth, is that it dates back to the time in the mid-90s when many observers were suggesting the company was doomed, with reserves down to a couple of months’ costs. I suspect that senior management - including Steve Jobs, who had just returned to Apple - determined they would never let the company get into that situation again. The recent forced changing of the guard allowed a review of that position.


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