Apple CEO Tim Cook gestures during the introduction of the iPhone 4S, at Apple headquarters in Cupertino, Calif. Apple Inc. is finally using its $98 billion pile of cash to reward shareholders, saying it's instituting both a dividend and share buyback program.Photo by Associated Press /Chattanooga Times Free Press.
By PETER SVENSSON
NEW YORK — Apple is finally acknowledging that it has more money than it needs. But don’t expect it to cut prices on iPhones and iPads. Instead, the company said on Monday that it will reward its shareholders with a dividend and a stock buyback program.
Apple, the world’s most valuable publicly traded company, sits on $97.6 billion in cash and securities.
The company has stockpiled the cash through a combination of great ideas and prudence. Apple spends money, to be sure, building data centers, buying parts for its products and pursuing ambitious projects such as a new 2.8-million-square-foot headquarters that has been likened to a spaceship. It also invests in the research and development of new technology and negotiates an occasional acquisition.
But Apple simply hasn’t managed to spend its earnings faster than people are lining up to buy its iPads, iPhones and other gadgets.
The decision to return some of that money to investors is a clear signal that Apple is taking a different approach in the post-Jobs era.
Former CEO Steve Jobs resisted calls to issue dividends for years. He argued that the money was better used to give Apple maneuvering room to acquire other companies, for instance. Apple did pay a quarterly dividend between 1987 and 1995, but Jobs was not involved with the company at the time.
Jobs died in October after a long fight with cancer.
Since then, pressure had been mounting on new CEO Tim Cook. Apple’s ever-growing pile of cash was earning a paltry amount of interest and the fact that it was sitting there unused could have left the company open to charges of mismanagement and possible shareholder lawsuits.
On Monday, Cook said that, with as much cash as Apple has on hand, a dividend won’t restrain the company’s options.
“These decisions will not close any doors for us,” he told analysts and reporters on a conference call.
Indeed, Apple can afford it. The dividend, which should placate shareholders, will cost about $10 billion the first year. Apple generated $31 billion in cash in the fiscal year that ended in September and analysts expect it to add another $70 billion to $85 billion this year.
Apple said it will pay a quarterly dividend of $2.65 per share, starting in its fiscal fourth quarter, which begins July 1.
The dividend works out to $10.60 annually, or 1.8 percent of the current stock price. Although Microsoft Corp., pays 2.5 percent of its stock price in dividends, and Hewlett-Packard Co. pays 2 percent, analyst Tavis McCourt at Morgan Keegan said Apple’s dividend is relatively generous for a large technology company.
Energy and phone companies often pay dividends worth more than 5 percent of their stock price.
In absolute terms, Apple will pay one of the richest dividends in the U.S. The roughly $10 billion it will spend in its first year, places it just below companies including AT&T Inc. and Verizon Communications Inc., which are among the biggest spenders because they use dividends as their main way to attract investors.
Exxon Mobil Corp., the world’s second largest company by market capitalization, pays about $9 billion in dividends annually.
The dividend opens up ownership of Apple shares to a wider range of stock mutual funds, potentially boosting the stock price in the long term. Many “value-oriented” stock funds are not allowed to buy stocks that don’t pay dividends
Apple said the $10 billion share buyback program will begin next fiscal year, which starts Sept. 30, and runs for three years.
Investors had been expecting the announcement, driving Apple’s stock up 37 percent since management hinted in January that a dividend was in the works.
Buybacks are a popular alternative to dividends, since they reduce the number of shares outstanding. That means every remaining investor owns a larger share of the company.
In late morning trading, Apple’s stock rose $7.93, or 1.3 percent, to $593.50. Last week, the shares hit an all-time record of $600.01. Since Steve Jobs’ death on Oct. 5, Apple’s stock is up nearly 60 percent. The company is worth $553 billion.
McCourt raised his price target on Apple’s stock to $800 on Monday, becoming the first Wall Street analyst to do so. A dozen have price targets in the $700 range. He had been expecting the dividend, he said, and the main reason for the higher price target is the company’s tremendous profit growth.
The dividend and buyback announcement comes three days after the launch of Apple’s latest iPad tablet in the U.S. and nine other countries. Cook said sales the first few days set a record, but gave no details.
Cook said the company also considered splitting its stock and continues to look at that option. Stock splits increase the number of shares while reducing their value, potentially making it easier for small investors to buy them. But Cook said “there’s very little support” for the idea that stock splits help the stock overall.
Cook suggested that the dividend could have been larger if U.S. tax laws were different.
Cook said that as Apple analyzed how much it could give out to shareholders, it looked solely at the cash it has in the U.S. Like many big exporters, Apple has much of its cash overseas —some $64 billion, specifically.
Apple is reluctant to bring back overseas profits. In addition to being taxed in their respective countries, those profits would be subject to the 35 percent U.S. corporate tax rate.
“Current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate a substantial amount of foreign cash,” Chief Financial Officer Peter Oppenheimer said.
Cook said Apple looked at how much domestic cash it had, then set aside enough for planned investments and unforeseen outlays. What was left over would be given out to shareholders, he said.
That suggests that if Apple could bring back its $64 billion in overseas money, the rewards to shareholders could be larger. Corporations have been clamoring for a change in tax laws, or a repeat of a 2004 tax amnesty on repatriated earnings.