Apple Inc.’s (NASDAQ:AAPL) New Dividend Will Help Send Shares Much Higher
David Zeiler: A new Apple Inc. (NASDAQ:AAPL) dividend will make the stock even more attractive while expanding the pool of potential investors. Apple announced that starting in September, it will pay a $2.65 quarterly dividend.
Apple also announced a $10 billion stock buyback program to be conducted over three years, beginning in September.
The stock buyback was a bigger surprise to analysts. While too small to move the stock significantly, Apple CEO Tim Cook said the intent is to avoid earnings-per-share dilution from future shares issued to reward employees.
The Cupertino, CA company’s enormous pile of cash and investments – over $97 billion as of the end of 2011 – had led to increasingly strident calls for an Apple dividend in recent years.
Yet despite today’s investor-friendly moves, some think Apple could have done more.
“The dividend is a start but still not enough,” said Money Morning Global Investing Strategist Martin Hutchinson. “It’s only about one-third of earnings, or less.”
Apple generated $31 billion in cash in its 2011 fiscal year; the new dividend will distribute about $10 billion a year to shareholders. Apple is expected to generate more than $40 billion in cash in fiscal year 2012.
So even with the dividend, Apple generates so much profit each year that its cash pile will continue to grow, just not as fast.
An Apple Dividend as Preventive Medicine
That cash pile worries Hutchinson. He believes that Apple needs to pay out more in dividends not only to reward shareholders, but also to prevent wasting its cash on large acquisitions that would distract management. [Related: Apple Inc.’s Gigantic Impact: Apple’s Meteoric Rise Is Distorting Everything]
He thinks that “at least $50 billion” of Apple’s current cash should be distributed to shareholders as a one-time dividend.
Nevertheless, any Apple dividend is a big leap forward for a company that until now has rigidly opposed doing so.
Measured by yield, the Apple dividend of 1.8% is somewhat subpar. While nearly twice the average of other tech companies in the Standard & Poor’s 500 Index (NYSEARCA:SPY), it’s lower than the 2.1% average yield for the S&P overall. [Related: How To Earn A 9.25% Gain In 30 Days While Waiting For Apple’s Dividend]
But in absolute terms, the Apple dividend will be among the highest in the United States.
Such a payout will not only reward current investors, but will attract new ones. Many value funds that required a stock to pay a dividend could not buy Apple. Now they can.
Without new investors, Apple stock would have had a tougher time pushing higher. AAPL has soared of late, rising 50%+ just this year. But the rapid rise and steep price of nearly $600+ a share had caused concern.
“Investors have been wrestling with the question of, ‘Who is left to buy the stock?’” Alex Gauna, tech analyst at JMP Securities, told CNN Money.
A Higher Apple Dividend
Although some were disappointed the Apple dividend wasn’t higher, it’s very likely the company will increase it in the future.
In fact, Apple’s board may have kept the dividend low to make it easier to raise later. Investors prefer companies that consistently raise dividends.
“We believe management will likely consistently raise the dividend level, given our expectation of strong free cash flow,” Scott Craig of Merrill Lynch said.
Apple’s other reason for the lower dividend was that two-thirds of its cash pile — $64 billion – sits overseas.
If Apple were to use any of that money to pay out dividends, it would have to pay the 35% U.S. corporate income tax first. [Related: 7 Reasons Apple’s Stock Could Be The Short Of A Lifetime]
Like many other large multinational corporations, Apple hopes a corporate tax holiday will allow it to bring most of that money home at a rate as low as 5%.
Congress last granted such a holiday back in 2004. A new holiday would open the door for Apple to distribute even more money to shareholders.
Until – and unless – that happens, most analysts see the new Apple dividend bearing fruit for investors.
“We believe the announcement holds promise for all types of investors; growth, value and income – which should attract more shareholders,” said Ben Reitzes of Barclays.
Related: PowerShares QQQ ETF (NASDAQ:QQQ).
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