Apple announces dividend: Will it bite into growth?

Analysis: The company will pay a quarterly $2.65 per share and buy back up to $10 billion in stock. It's an admission that the company has reached a certain level of maturity and that its expansion may slow.

By InvestorPlace Mar 19, 2012 9:57AM

By Jeff Reeves


investorplace logoApple Inc. (AAPL) has been sitting on a mountain of cash for ages. As of its most recent earnings report in January, that stockpile included $30.1 billion in cash and short-term investments and $67.4 billion in long-term investments.


Rumors have always swirled around what Apple was planning to do with that money. Buyouts, crazy new product developments and a dividend have been on the radar as moves Apple could make -- orshould make, according to certain stockholders.


This morning, Apple finally put the speculation to rest. It will pay a dividend of $2.65 per share quarterly, first payable on July 1, for a yield of around 1.8% at current pricing. Apple also will repurchase up to $10 billion in stock.


Post continues below.

Apple's decision to pay a dividend is a big deal for a number of reasons -- and some of them are not altogether pleasant.


If you want to be alarmist, you could see this as a sign that Apple is at risk of becoming very much like Microsoft (MSFT). (Microsoft owns and publishes Top Stocks, an MSN Money site.)


Apple admits business has matured

For starters, the simple move to deliver cash back to shareholders is an admission that Apple has reached a certain level of maturity in its business and that growth is going to be increasingly harder to come by. This is the most significant development of all for many investors.


Consider that the vast majority of highflying tech stocks do not pay a dividend, because they prefer to invest in their own business. This is true for tiny software companies as well as for some of the biggest names in tech.


Case in point: Google (GOOG) does not pay a dividend. In fact, the search giant's $12.5 billion buyout of Motorola might not have been possible if it started bleeding down its cash years ago with a dividend. Another good example is Amazon (AMZN), which has committed billions in research and production costs to its Kindle e-reader. Amazon is bleeding so much cash that the giant tech stock basically will break even in the current quarter. If Amazon was paying out hundreds of millions in dividends, that kind of investment in itself would be impossible.


Bottom line is that if you do the math, Apple's $2.65-per-share dividend is a stunning $2.5 billion per quarter -- $10 billion annually. Imagine the buyouts or research you could do with that chunk of change. But instead, Apple is giving that cash back to shareholders.


The risk of buyback backfires

The buyback plan echoes this sentiment. A press release Monday said Apple has also authorized a $10 billion stock repurchase plan that will begin in September and last as long as three years. The primary objective is "neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs."


Stock buybacks are old hat for many Wall Street megastocks. Cynical investors say that is because it's a common way to juice earnings-per-share numbers. By reducing the number of shares outstanding by buying them back, EPS numbers rise by virtue of simple math -- not by growth.


Sometimes those buybacks are just a waste of money, too. Consider that since 2006, Microsoft has spent almost $80 billion on share buybacks, including a current $40 billion buyback program that runs through 2013. The stock has mostly flatlined when you back out the strong year-to-date rally of 25% in about three months.


Apple's corporate line makes sense, to a point. The buyback of shares will keep the number of outstanding AAPL shares constant as new stock is issued to insiders. But come on, do we really expect Apple to dish out $10 billion in stock awards? That's a huge chunk, so Apple will be able to cover that balance and much more.


Don't panic: Apple will see few short-term changes

This is not to say Apple is doomed to die a slow death. In the conference call Monday, Apple focused a lot on investments in R&D and acquisitions and retail. This year alone, Apple is opening 40 new locations.


"We don't see ceilings for our opportunities," CEO Tim Cook told reporters. Innovation is the "most important objective at Apple, and we will not lose sight of that. These decisions will not close any doors for us."


Cook also said Apple will have a war chest for future acquisitions and developments. That's believable, since $100 billion in hard cash on the books and the wildly profitable iPhone and iPad will continue to generate no shortage of future profits. So don't think that by next year Apple will be a slow-and-steady stock that sees only incremental growth.


But let's be honest: The company has just committed one-fifth of its stockpile -- $20 billion -- to dividends and repurchases. These moves deliver a form of value to shareholders, but clearly Apple has decided it is getting increasingly difficult to see exponential growth, considering the size of its current operations.


Apple surely will keep growing. Its recent iPad relaunch will increase its stranglehold on the tablet market. The iPhone is a $50 billion business annually, so this gadget alone provides the cash flow for the ambitious dividend and stock repurchase plans.


But over the next several years, you can expect some slow but serious changes in Apple's approach. The shareholder base will change, and dividend investors will get more involved. The balance sheet will evolve as these huge commitments take up a bigger part of the company's operations.


And now that Apple has finally declared a dividend, it will have to deal with demands to increase that payout. After all, it's only 25% of profits, and historically, S&P 500 companies offer around a 50% dividend payout ratio.


In short, these recent dividend and buyback moves will slowly begin to change how Apple stock is perceived by investors and how corporate executives operate this publicly traded company.


So don't be surprised if five or 10 years from now Apple has a lot more in common with Microsoft and other mature tech stocks than it does with innovative, high-growth startups.


Just how important is Apple stock? Read about what life would be like without Apple -- for investors and consumers alike.



Jeff Reeves is the editor of InvestorPlace.com, and the author of The Frugal Investor's Guide to Finding Great Stocks. Write to him at editor@investorplace​.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned securities.



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53Comments
Mar 19, 2012 11:53AM
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They could have used some of that money to bring back production from China.  They are making insane amounts of profits so a little less wouldn't have hurt them.  Those jobs would have really helped our economy.
Mar 19, 2012 2:53PM
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Maybe they could lower the price of thier products???
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They make their products at Foxcon in China. They  pay slave labor wages to children that work in those factories. Maybe if they made their products here in the us and paid a fair wage they would not have such a problem like too much money. I would never buy their stupid toys, apple is overpriced and not worth half of what they charge, being a computer tech I have a good idea what their product is worth. Go ahead buy the apple junk, a product made by an exploited child. Continue to support american businesses who send their work to 3rd world countries to have kids working in sweatshops for pennies a day while they sit back and make billions. How much of that did they pay in taxes? I have to pay a 35% tax on my computer repair business, I bet apple pays next to nothing. When you buy products made in China you are supporting China, the country that now pretty much owns us thanks to the greed of mega corporations and their puppets in congress. How long will that wealth last after you have destroyed the rest of the middle class?
Mar 19, 2012 11:06AM
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This is what is wrong with investing these days.   A company does a pro-share holder move and it is viewed as a negative.   The stock market is completely out of touch with the real world.

Mar 19, 2012 11:23AM
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How about Apple pushes everyone out of Washington and takes over operating this country? They sure as hell know how to balance a budget and have lots left over!
Mar 19, 2012 11:36AM
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Little more than a superficial analysis....no attempt to even discuss the valuation of Apple or the companies you try to compare it to.  All in all, a waste of my time.
Mar 19, 2012 1:43PM
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So why is it that Apple is not considered an "evil corporation" when it is sitting on that much cash? Somehow only banks and oil companies qualify for that title. Can someone explain this to me please?
Mar 19, 2012 11:05AM
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You have got to be kidding me.  The only reason they have to find someway to reduce the cash pile is because it is over $100 billion!!!  Its more that TWICE that of ANY other company in the world.  Apple will continue to see 100%+ growth with exploding global smartphone and tablet markets that are far from mature.  This article is an embarrasing and lazy look at AAPL through a traditional lens.  This company and stock is just something different than we have seen to date.  To compare AAPL to Microsoft who started paying a dividend when they had over 90% of the mature PC OS business is not even close to the position Apple finds itself.  This is still one of the most aggressive growth stocks out there with consensus price targets from mid $600's all the way up to $900+.  

This author is either just click trolling or a total idiot.   
Mar 19, 2012 10:31AM
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They have more money than they need for day to day operations. What better way to return cash back to shareholders?

I wouldn't count the Apple growth story as over. There's still emerging markets to grow to, there's still revolutionary and evolutionary products to be released in the future. iphone 5, ipad 4 and who knows what else. 
Mar 19, 2012 4:53PM
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LOL, to all those trendy 'progressives' that chose Apple products to be mainstream and 'anti-establishment'.  Well, guess what... You NOW support the establishment.  So NOW you're part of the problem.   Hypocrates...LOL!!!!

 

 

Mar 19, 2012 11:44AM
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   Unbelievable!   A company has the audacity to give some of its money back to it's shareholders.   There must be something wrong with the company that can't find a way to blow the money it has on hand.
Mar 19, 2012 12:17PM
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$97.5 billion in assets and not a FLASH was given that day.
Mar 19, 2012 11:56AM
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You forget a major point.  Apple generates over $33 Billion in Free Cash Flow a year currently.  Even if it paid out the $20 billion out fully this year it will still increase its cash position by over $13 Billion assuming it does not make any big acquisitions.
Mar 19, 2012 10:46AM
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I see you have your hand out, Barb. (sign of the times)
Mar 19, 2012 1:45PM
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These "writers" skew the facts big time.

A DIVIDEND is NOT "giving up" or, giving anything away  as if investors are the last people Apple should pay. . not.. . .they are supposed to pay their investors. The writer makes it sound like Apple is doing investors some kind of favor. We investors expect two kinds of return. . at least. First dividends, then "gains' upon sale. BOTH used to be what we expected of Blue Chip companies. Apple is Blue Chip/best so? The danger in this writers missives/attitude is failing to point this out. Pointing this out would be a balanced reasonable portrayal of this. Not as is.

Mar 19, 2012 3:21PM
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Typically a company increases it's dividend when they cannot invest the money at a greater rate than their internal rate of return  (cost of acquiring more money).  Contrast the case of Apple which has a use for some of it's excess gains vs Microsoft which is just hoarding money and costing shareholders profits.  Seems like Apple is using some financial logic and considering their stockholders in a time of greed and self-interest.  They will become "Mature" when the profits go to their executives.
Mar 19, 2012 5:22PM
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lol yeah pay off the rich investors first, forget about improving worker conditions
Mar 19, 2012 2:02PM
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Typical "damned if they do, damned if they don't" Monday morning quarterbacking by the media.  If Apple had NOT declared a dividend today they would have come up with some other way of saying the company is blowing it big time.

Personally, what I would LOVE to see Apple do is spend at least a portion of that cash on pure research and development.  Not Product R&D - pure R&D.  Apple has such a great talent for coming up with new stuff that can you imagine what a little investment in pure R&D might yield for the company (or even just human kind!) down the road...?  I think THAT would have been much more exciting than a dividend.
Mar 19, 2012 11:19AM
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Paying a dividend doesn't damage a company's financial position if the payout ratio is reasonable and the excess cash isn't required to grow revenue or profits. Apple's market cap is excessive due to their sitting on a $100 billion in cash. Apple will be hurt more by their single product line, mobile consumer PCs, not being broad enough to sustain past growth levels.
Mar 19, 2012 5:48PM
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You can't take it with you  Need to spread the wealth a little better.
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