By Jack Hough
Apple’s newly announced dividend payments will transfer around $9.9 billion of its cash to shareholders each year. That shatters the previous record for largest dividend initiation–Cisco last year with $1.3 billion–and it vaults Apple (AAPL) to the No. 2 spot among all companies. AT&T (T) is No. 1, spending $10.4 billion a year on dividends.
Apple also authorized $10 billion for share repurchases, to be spent over three years. Share repurchases reduce the number of outstanding shares, thereby increasing earnings per share and, in theory, making remaining shares more valuable.
Yet Apple still deserves a place on the A&E show “Hoarders”. Here’s why.
Like a recluse with a house stuffed with unread newspapers and magazines, Apple is sitting on $98 billion in cash and investments. That’s a massive sum, just about equal to the stock market value of McDonald’s.
Apple earns enormous profits on the capital it puts to work–close to 40% returns over the past year. But it has more cash than it can possibly put to work, and since the company invests conservatively, at today’s rates it likely collects a yield of less than 1% a year on its portfolio.
The share repurchases should be a boon, because they will turn idle cash into a larger stake in what has recently been one of the market’s most lucrative stocks: Apple. But Apple says the primary goal of its plan is to offset the dilution from employee stock grants. In other words, Apple will use repurchases to sop up the supply of shares created from using its stock as pay. That’s not so much returning cash to shareholders as it is a transfer of balance sheet cash to employees (unless the repurchased shares far outnumber the newly issued ones).
The dividend gives stockholders an opportunity to invest the cash as they see fit, hopefully with higher returns than Apple is getting. That should be a good deal for investors, even if many will have to pay taxes up front. (The dividend tax rate is currently capped at 15%; next year’s rate has yet to be determined by Congress.) And Apple’s new dividend yield, 1.8% if the payment is calculated against Friday’s closing price, is close to the broad market’s yield.
But Apple will generate $75 to $80 billion in free cash over the next four quarters alone, according to estimates by investment bank Sterne Agee. That means its new dividend-and-repurchase plan, until it is made more generous, isn’t really a plan to spend down cash. It’s a plan to keep right on hoarding–even faster this year than last year–while placating investors who’ve been grumbling about the cash.
If the stock price keeps rising, however, investors will likely have few complaints.