At the end of 2011, Apple had a very enviable problem. It’s not too many companies today that have more cash than they know what to do with, and for the electronics giant, that amounted to nearly $100 billion burning a whole it its pocket.
So it certainly pleased current and potential investors when Apple announced that, for the first time since the mid-90s, the company will start paying a dividend.
To appreciate the scale of Apple’s conundrum, consider that in the last three months of 2011, the company was generating more than a billion dollars in profit free and clear each and every week.
By the end of the year, it had enough cash on hand to buy Goldman Sachs, outright; even after that it would have had almost enough cash left over to buy General Motors as well.
It’s not that Apple has not been spending, it has, but over the past few years Apple has spent several billion dollars locking down critical parts and supplies for the iPhone and iPad. It spent several hundred million buying the company the created Siri and a couple of other small start-ups.
Apple also spent aggressively opening dozens of new stores around the world.
“Even with these investments we can maintain a war chest for strategic opportunities and have plenty of cash to run our business,” said Apple CEO Tim Cook on a morning conference call. “So we are going to initiate a dividend and share repurchase program.”
Boon For Investors
Starting later this year, Apple will spend about $5 billion annually buying back its existing stock. This stock buyback program is relatively small, and really just intended to off set any new stock that Apple gives out to its employees.
Apple will also begin paying a dividend of $2.65 a share this summer. That will cost the company about $10 billion in cash each a year.
“It really opens the stock up to a much broader group of investors, principally value- and dividend-oriented mutual funds,” says John Lutz, who’s helped manage a mutual fund that’s been invested in Apple for years.
Apple stock price has been rising so fast that a lot of institutional investors like Lutz can’t really buy any more.
“It’s a problem a lot of growth managers have,” he says. “For us they are simply capped out in terms of how large a position Apple can represent in their portfolio.”
The idea being that it is too risky to put all your eggs in one basket, even if the basket is named Apple.
But by paying a dividend, a whole new group of institutional investors can start buying this stock. These are folks who cater to retirees and other people who need to earn some income from their investments.
Peter Oppenhiemer, Apple’s chief financial officer, says the company will soon pay out more than $2.5 billion to investors every quarter, which he says would make Apple, “one of the highest dividend payers in the United States.”
No End In Sight
As a percentage of its earnings, however, Apple is paying less in dividends than other technology giants like Microsoft and Cisco. Most analysts expect the cash to keep piling up, and by the end of the year it’s likely that Apple will have more than $100 billion stashed away in offshore accounts.
CEO Tim Cook said this morning that Apple had a record-breaking weekend of iPad sales. The company released its latest version of the tablet on Friday.
Apple’s stock price is up 45 percent from this time last year, and it is up tenfold in the last six years. And it’s up because, as investor John Lutz says, “they have been absolutely knocking the cover off of the ball.”
Lutz says the news this morning that the stock will begin paying dividends is just a cherry on top of the Apple pie.