Juicing the Apple: On dividends and stock buy backs

Juicing the Apple: On dividends and stock buy backs

Apple lays out $45 billion, 3 year strategy to attract new investors and neutralize dilution

As expected, and hinted at by Apple CEO Tim Cook, Apple announced the start of a regular quarterly dividend this morning. They also announced intentions to buy back stock, although the dividend is the bigger news, and drew more questions from analysts on the call.

Apple held a conference call at 6am in their home time zone. That’s 9am for us East Coast people, and more importantly, it’s about the latest you can start a call while still getting all the news out before the stock market opens at 9:30am. So for those of you wondering why Apple held the call so early, its’ all about getting news out into the public’s hands before the market opens.

So what did they say? Here’s a summary of the main points:

  • Apple has declared a divided of $2.65 per share starting around July. This, alone, will consume almost $10 billion of cash per year, based on Apple’s current shares outstanding of just over 932 million.
  • Apple will also buy back about $10 billion of stock over the next three years. The focus of the buyback is to offset share growth from stock the company issues to employees, and stock that employees buy as part of the employee stock purchase plan.
  • Although Apple has almost $100 billion in cash, only about $34 billion is domestic (held in the US). The rest is in foreign markets, and Apple would have to pay heavy taxes on this cash if they were to repatriate it right now. They are trying to convince congress that these US tax policies on repatriated cash are hurting local investments. It seems like a no-brainer to me. Apple doesn’t need to bring the money back home, and won’t if it is heavily taxed.
  • Unrelated to the use of cash announcement, Tim Cook did reveal that Apple had a “record weekend”, in vaguely answering a question about the launch of the new iPad.

Dividends opens the door to new investors

In the world of investing, different types of funds have different mandates. Some funds are mandated to only buy dividend-paying stocks. Obviously these funds would not have been allowed to buy Apple stock in the past.

Now that this has changed, it opens the door to new buyers. This is one of the reasons that dividends often result in short term spikes in a stock’s trading price.

On top of this, we can expect demand among these new investors will be hot. After all, Apple is trading at an attractive P/E (price to earnings ratio) of only 14x based on this year’s expected earnings. Given the super strong growth rate of the company, this puts Apple stock in both the “value” and the “growth” camps at the same time. Dividend investment funds love this.

Plenty of room to grow

The $2.65 per quarter dividend means that investors are getting about 1.8% per year. Some analysts suggested that Apple could go up to 2.5%. And I agree with them. But we have to remember that companies who initiate dividends always want to position themselves to look good in the future. So they start slowly. They pay what they know can be easily paid. Then, over time, they increase the dividend.

Apple could even hold its payout ratio constant, and just grow its dividend based upon organic company growth. But if growth slows, and the need for such a huge cash war chest lessens, Apple can continue to grow its dividend by increasing the payout ratio.

Have something to say about this story? Leave a comment! Need help with something else? Ask in our forums!

Chris Umiastowski

Chris was a sell side financial analyst covering the tech sector for over 10 years. He left the industry to enjoy a change in lifestyle as an entrepreneur, consultant, and technology writer.

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Reader comments

Juicing the Apple: On dividends and stock buy backs


US Tax policy is NOT going to change. In fact, it ought to actually INCREASE the amount giant corporations pay. As with everything that Apple seems to do, this is a pretty conservative (actually tepid) proposal and does not speak at all to the impact Apple COULD have if they chose additional paths for investment..

Taxes don't pay enough for anything anyway. I have never seen anything good come out of raising taxes for the good of the people. All that happens is government emplyees get richer and that's it. As it stands right now, government employees already get the best of everything. Do you think anyone in government pays out their ass for health insurance or anything of the sort. Meanwhile people are losing their homes because of it. The US government needs to stop taking the people's money and wasting it on crap ideals and projects that we don't authorize. That's the first thing that should be happening. Next, people in public office should have their salaries dropped substantially and the savings passed down to public projects that they're currently not funding properly... healthcare, education, etc. If you're in public office, you're a public servant... you shouldn't make more than the average joe because chances are good you've probably already come from money and your family will survive just fine without you driving expensive cars and living in big ass houses. What this country needs is a big reform in the form of keeping everyone in power in a much bigger check than what's happening now and this is regardless of political party affiliation. It goes for everyone from local goverments all the way up to Capitol Hill.

...said after you take a dump into a government-funded sewage and water treatment system after you drink water from a government-created water system after packing school lunches consisting of USDA-certified safe meat products and driving your kids on government created roads created and maintained by government institutions patrolled government funded police officers to government funded schools whose fire safety is provided by other government funded officers.
But really, government does nothing...and we'd all be swimming in cash if only those greedy people down at the DMV weren't paid so much!

…said after you take a dump into a government-funded sewage (State funded) and water treatment system (State funded) after you drink water from a government-created water system (State funded) after packing school lunches consisting of USDA-certified safe meat products and driving your kids on government created roads (mostly State funded) created and maintained by government institutions (State funded) patrolled government funded police officers (all State funded) to government funded schools (State funded) whose fire safety is provided by other government funded officers (all State funded).
But really, (FEDERAL) government does nothing…and we’d all be swimming in cash if only those greedy people down at the DMV (State funded) weren’t paid so much!
Make sure you understand what government runs what.

Maybe in bankrupt states like California that fail to support themselves. In my state -- most things are funded by the STATE. It's part of that whole sovereignty thing that the administration is trying to take away.

They're not talking about taxes from the money they make in the US. What they're referring to, is the amount of money they would have to pay in taxes just to bring the money sitting tidy overseas.

Increase the tax amount after Apple just said they won't bring more because of the ridiculous tax codes? Makes sense. ~s
We should increase YOUR taxes ~Ns

Good thing he didn't talk about stopping child slavery eh Chris, that woulda just bored the life out of you...

Yeah, because if goverent didn't exist there would be no sewers, no roads, no defense or ways to settle disputes. People would just be murdering each other in the mud. That's the stupidest thing I've heard all week and tiresome to boot. It is just an example of how too many citizens are just clueless slaves.
Taxes are not levied for the benefit of the taxed. Until you understand that, and that there are no meaningful differences between Democrats and Republicans, both of whom like wars and higher spending, you will not even begin to understand the true problems.
The answer is never taxes or government.

Steve Jobs was against issueing a dividend and as soon as he dies they issue one. Honestly this gives me a bit of concern about the direction of apple. i've no evidence. i'm obviously not in meetings but i don't think if steve was alive this would happen. It just makes me wonder if this is the beginning of a direction at apple without steve that people feared. That decisions wouldn't be the same as with him. And we haven't seen any new big products in a while. So i'm just keeping my eye out to see if the growth of apple is over. I don't know. But i wonder if they have more ideas. More big ideas that is.

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