Apple Dividend May Return Part of $98B in Cash

By Adam Satariano - Mar 1, 2012 4:44 AM GMT+0700

Apple's Market Cap Tops $500 Billion

Apple Inc. (AAPL), which today topped a $500 billion market capitalization, will probably start paying a dividend this year, attempting to appease investors who have said the electronics maker is hoarding too much cash.

The company is likely to declare a quarterly dividend of about $2 a share before the year is out, according to data compiled by Bloomberg. The projections are based in part on the dividends paid by other large technology providers, including Microsoft Corp. (MSFT) and International Business Machines Corp.

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An Apple Store is seen reflected in a window in San Francisco, on Jan. 24, 2012. Photographer:Justin Sullivan/Getty Images

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Feb. 24 (Bloomberg) -- Paul Kedrosky, author of the Infectious Greed Blog and a Bloomberg contributing editor, talks about how Apple Inc. may use its $97.6 billion in cash and investments. Kedrosky also discusses Proview International Holdings Ltd.'s U.S. lawsuit against Apple over the iPad trademark and the rise in video data sent over mobile networks. He speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

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Feb. 24 (Bloomberg) -- Lawrence Haverty, portfolio manager at Gamco Investors Inc., talks about the outlook for Apple. Inc. Apple Chief Executive Officer Tim Cook told investors yesterday that the company is exploring how to use its $97.6 billion in cash in investments, responding to criticism that its balance sheet holds too big a hoard. Haverty, speaking with Betty Liu, Cris Valerio and Sheila Dharmarajan on Bloomberg Television's "In the Loop,” also talks about the outlook for J.C. Penney Co. (Source: Bloomberg)

An Apple dividend would be a boon to investors and would probably yield benefits for the company, which has $97.6 billion in cash and investments, and can afford the $7.46 billion a year that a $2 dividend would cost. A dividend could provide a boost to Apple by attracting a new class of investors that only hold stock in dividend-paying companies. Apple also may buy back shares, another move that could lift its stock price.

Chief Executive Officer Tim Cook said this month that officials are in “active discussions” about what to do with the company’s cash and investments, saying that the sum is “more than we need to run a company.”

Cook isn’t likely to get much argument from investors.

“Why not do the sensible thing and begin to share part of the capital that any rational person would say is beyond what the company needs to sustain itself with shareholders,” said Keith Goddard, CEO of Capital Advisors Inc., an Apple shareholder.

Other investors that have called on Apple to pay a dividend include Wedgewood Partners Inc. and Sustainable Growth Advisers LP.

Predicting a Dividend

Analysts at Morgan Stanley, JPMorgan Chase & Co., Mizuho Securities USA Inc. and Sterne Agee & Leach Inc. also predict that Apple will institute a dividend some time soon.

Apple generated $16 billion in cash in the first quarter of fiscal 2012. Shaw Wu, an analyst at Sterne Agee & Leach, predicts Apple will generate about $75 billion in new cash this year alone.

In determining its dividend estimate, Bloomberg takes into account the dividend size of other large technology companies, Apple’s projected earnings for next year and the amount of money on its balance sheet.

Steve Dowling, a spokesman for Apple, declined to comment beyond the remarks made earlier by Cook.

Apple rose 1.3 percent to $542.44 at the close in New York. The shares have climbed 34 percent this year.

Investors’ Potential Benefit

A $2-a-quarter dividend would mean hundreds of millions of dollars in new revenue for Apple’s top institutional investors.

Fidelity Management & Research Co., Apple’s biggest investor, stands to make about $97.2 million each quarter, based on its holding of 48.6 million shares at the end of 2011. Vanguard Group Inc., the No. 2 holder, would make $74.4 million, while State Street Corp., Apple’s third-largest investor, would make $69.5 million.

Instituting a dividend might also provide a long-term boost to Apple’s stock price by bringing in investors who are restricted to buying shares in dividend-paying companies, said Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co., and Sterne Agee’s Wu. With interest rates so low, investors are putting more money into dividend-paying stocks that regularly return money to shareholders, Wu said.

One-Time Option

Apple may choose to make a one-time distribution, rather than making a quarterly payment, said Doron Nissim, a professor of accounting at Columbia Business School in New York. A single payout would leave investors less vulnerable to subsequent increases in taxes on dividends, while also removing the risk to Apple’s stock price if they someday were to end the dividend, he said.

Apple last paid a dividend in 1995, before co-founder Steve Jobs returned as CEO and led the introduction of top-selling products including the iPod, iPhone and iPad. The final dividend, of 12 cents a share, was suspended amid leadership upheaval and dwindling computer-market share. According to a company filing, Apple’s cash, equivalents and short-term investments dropped by about half, to $491 million, in the year through Sept. 29, 1995.

In the years since, Apple has ascended to become the world’s most valuable company, with a market value of $505.8 billion, more than Exxon Mobil Corp. (XOM) In January, the company reported record profit of $13.1 billion on sales of $46.3 billion.

“They can pay a very significant amount,” Columbia’s Nissim said.

Overseas Accounts

Still, the amount of cash that Apple can use for dividend payments is limited because the company keeps about 60 percent of its money in overseas accounts. Apple’s taxes were almost $4 billion lower in fiscal 2011 than if it had reported all income was earned in the U.S., Nissim said. And Apple could ultimately issue a dividend bigger or smaller than $2 a share, or decide not to declare a quarterly payout.

Jobs, who died in October, had long rebuffed calls to return money to investors. Since taking over as CEO, Cook has signaled a greater willingness to heed the concerns of shareholders, including criticism that the company is stockpiling too much cash.

“The board and management team are thinking about this very deeply,” Cook said last week at the company’s shareholder meeting, reiterating earlier comments.

Microsoft’s Approach

The closest analogy to Apple’s situation is Microsoft, which started to pay a regular dividend in 2003, said Columbia’s Nissim, whose research includes the effectiveness of dividends. Microsoft, the world’s largest software maker, also paid a one- time special dividend in 2004, using $32 billion of its $56.4 billion in available cash at the time.

Apple and Google Inc., owner of the world’s most popular search engine, are the only technology companies with a market value higher than $100 billion that don’t pay a dividend. In September, Microsoft boosted its quarterly dividend by 25 percent to 20 cents a share. Intel (INTC), the world’s largest chipmaker, raised its dividend in May to 21 cents, from 18 cents. IBM pays a dividend of 75 cents a share. Cisco Systems Inc.’s quarterly payout is 8 cents a share.

“The board and Tim Cook are feeling the pressure,” Mark Bronzo, who helps manage about $24 billion at Security Global Investors in Irvington, New York, said in a telephone interview. “It’s very likely that we’ll see Apple pay a dividend, that we’ll see Apple return some cash to shareholders.”

To contact the reporters on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net;

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net.