- Issuing a quarterly dividend of $2.65 per share beginning July 1, 2012
- Implementing a $10B share buyback program, spanning 3 years and commencing September 30, 2012
ADVANTAGES OF DIVIDEND ISSUANCE
Companies typically issue dividends when they experience periods of stunted growth. Dividends serve as a means of attracting defensive-minded investors who pursue stable sources of income such as dividends, as opposed to high-growth, riskier equities with greater potential for ROI. However, strong growth and dividend issuance aren't necessarily mutually exclusive, as is the case with Apple. Apple's dividend issuance creates a number of opportunities including:
- Increased demand and a higher stock price, through widened access to the stock. Mandates restrict certain dividend-funds from purchasing stock that do not provide dividends, for risk aversion purposes. Apple's scheduled issuance opens the doors to most dividend-orientated funds. This drives demand and naturally, the stock price as fund managers seek to capitalize on lucrative stock that also provide a consistent source of income
- Increased demand will also be supported by regular investors who are interested in defensive investing
- Increased shareholder wealth through the return of Apple's earnings
- Apple's 1.81% annual dividend yield is roughly on par with the S&P 500's annual dividend yield of 2.07%. Such dividend yields are a rarity for companies with high-growth prospects
Are dividends the most cost efficient way of addressing Apple's excessive cash reserves? Disadvantages of Apple's dividend issuance are:
- Taxation diminishes the true value of earnings. $1 of earnings channeled for issuance does not translate into $1 of shareholder dividend income, due to the 15% dividend tax rate. Furthermore, money brought from overseas is subject to a repatriation tax. Tim Cook mentioned that earnings applied to dividends will be based on domestic reserves. However, this is concerning since $64B of the cash hoard is overseas. Also, overseas reserves have grown by 82% over the last year
- Is issuance the most efficient means of spending money? Is it more efficient to spend on research and development, marketing, or the establishment of reserves to account for any unforeseen liabilities? $1 of earnings translates into $1 of spending through these avenues
Stock repurchasing is the act of a company purchasing it's floated shares. The reduction in float results in increased EPS, assuming flat earnings quarter over quarter. Increased EPS directly results in a more favorable stock valuation. Apple's recent repurchase buyback should drive the stock price in the future. Apple's current market capitalization is $561B. The $10B buyback figure totals less than 2% of the current market capitalization so the impact of the stock buyback would be minimal. Furthermore, it is expected that the market capitalization will expand over the next few years, which would lessen the impact of the stock buyback to an ever greater extent.
CONCLUSION
I believe Apple's recent dividend and buyback announcement was a smart ploy because it significantly increases demand by attracting dividend-orientated funds and defensive investors. Quantitatively, the $2.65 quarterly dividend and $10B total stock buyback represents a small fraction of the $96B cash hoard. This was also an astute decision as the company minimizes or possibly avoids the impact of repatriation taxes and keeps significant cash reserves for product innovation, marketing and any unforeseen liabilities.
