Apple announced this morning that, in response to various levels of pressure, it will be dispersing some of its $100-billion cash hoard by paying a $2.65 quarterly dividend to shareholders, starting in 2013, and buying back $10 billion worth of stock. These were both fairly conservative, but far from unexpected, moves. As soon as Apple announced that it would be...making an announcement, some kind of dividend scenario was in the picture. The questions were along the lines of "How big?" and "Will it be a one-time dividend?"
Apple's stock, not surprisingly, is waaaayyy up in trading this morning, currently humming along just a hair below $600. Actually, it's been headed almost straight up since last December. And it could have been set up by Apple CEO Tim Cook and CFO Peter Oppenheimer to move higher, but they went for a relatively small dividend: 1.8 percent versus what Apple's biggest Wall Street bulls wanted, something like 2.5 percent.
The decision to pay a dividend can be seen as a reversal of Steve Jobs position outlined in 2010 at a shareholder’s meeting that dividends do not add to the value of a share. Jobs was questioned at that meeting about the possibility of using the company’s cash reserves to pay a quarterly dividend. The cash available to the company at the time was a mere $40 billion. This reversal of a Jobs belief is interesting for the company whose future even now seems at least philosophically reliant on the former CEO’s vision. This may simply be a financial decision the board has undertaken to increase the value of the shares, but it still delineates Apple's relationship with its past. This may be the first transgression over the principle’s set down by Jobs and may show a changing attitude to the company’s co-founder. Even in a small way a change in this attitude could say a lot about the company’s future.
Some other commenters have noted that this move reduces the chance that Apple management will make a stupid acquisition decision. This isn't a company that has much of a history of acquiring anybody. But that hasn't quashed the "Apple should buy Twitter" speculation. For my part, I'm contributing to this by saying that Apple should buy BlackBerry maker Research in Motion. But then again I figured Apple would pay out a one-time dividend, to shut up its grumpy shareholders who can't content themselves with the stock possibly going to $1000 per share by the end of the year.
One other wrinkle to deal with: the majority of Apple's cash is held outside the U.S. — $64 billion. And won't be coming back unless the government makes changes to tax laws that affected cash "repatriation." So really Apple's current domestic cash pile, once it gets done with dividends and buybacks, will over the next three years be down to zero. Of course, Apple will make gobs more money between now and 2015. So what to do with all the money is going to become a recurrent problem, as long as the company continues to rack up tens of billions in profits.
As far as deviating from Jobs' vision, the theory is that Apple, which almost went out of business before Jobs returned to the company, likes to have cash on hand to defend against competitors and reinvest in innovation. But that would be innovation at the product and software level. Tim Cook doesn't innovate in these areas — his forté is streamlining Apple's supply chain and forcing suppliers to accept very skinny margins in exchange for keeping Apple's business.
Oh, and Apple has also gotten pretty good at getting money out of the wireless providers that sell iPhones.
So when you think about it, Apple's cash hoard has really come from extracting profits from its Asian contract manufacturers, who support Apple's 30-plus profit margins by slashing their own; and by extracting profits from the likes of Verizon and AT&T, who have to subsidize customer purchases of ex-pen-sive iPhones. For the moment, Foxconn and American's biggest wireless providers are willing to accept a redistribution of wealth from their balance sheets to Apple's. But you have to wonder how long that will last — especially if people like Shea are right and the post-Jobs Apple shifts its focus from product innovation to the care and feeding of shareholders (more than 70 percent of who are big institutional investors and hedge funds).
So if you're an Apple shareholder, you should be thankful that Foxconn is willing to slash its margins, and that Verizon and AT&T are willing to sell their own shareholders down the river, in order to create the Apple profit margins that have generated your dividend and enabled the buyback that will definitely push the stock above $600.