The longstanding question of just what Apple would do with its tens of billions of dollars in cash gained at least two answers today, in an Apple conference call with press and analysts. CEO Tim Cook and CFO Peter Oppenheimer announced that Apple will start paying a quarterly $2.65 per share dividend, starting in the September quarter (which, if I’m doing the math right, would be Apple’s fiscal fourth quarter of 2012). That will reportedly make Apple one of the largest dividend payers in the United States. Plus, starting in
the December quarter (Apple’s fiscal Q1 2013), the company will start to repurchase Apple stock to limit the future dilution of share ownership from employee stock grants and the employee stock purchase program. All told, over the next three years, Apple anticipates spending $45 billion on these programs. (Of course, as our friend Marshall Clow pointed out, this level of expenditure won’t reduce Apple’s cash hoard but will only make it grow more slowly.)
Tim Cook took pains to emphasize that innovation remains Apple’s most important objective, given that the decision to start paying dividends generally indicates that a company feels it can no longer increase profits by rolling money back into the business. For instance, Cook said that although Apple sold 37 million iPhones in the last quarter, that represented less than 9 percent of the handsets sold overall. The worldwide cell phone market is expected to grow from 1.6 billion units in 2011 to over 2 billion by 2015, with all handsets becoming smartphones eventually, which Apple takes as indication that iPhone sales won’t be slowing any time soon. Add to that Apple’s 55 million iPads sold at the end of the most recent quarter,
viewed against Gartner’s estimate that the tablet market will reach 325 million units by 2015 and Apple’s belief that the tablet market will eventually surpass the PC market, and you can see how Apple doesn’t believe its growth will be leveling out in the near future.
It’s hard to argue — Apple has been generating cash at an unprecedented rate over the last few years, even while investing money into R&D, acquisition, retail stores, strategic prepayments and capital expenditures in the supply chain, and infrastructure. Also mentioned as an investment, interestingly, was a direct enterprise sales force — Apple may not be designing products explicitly for the enterprise, but the company is apparently working to sell into that market. Apple will continue to do all these things, and retain a war chest for unanticipated opportunities and contingencies, but Apple’s Scrooge McDuck money pit is still overflowing.
So what to do with the excess? Start returning some of it to shareholders in the form of a quarterly $2.65 per share dividend. That will, Cook said, not only provide income to current investors, but will also make Apple stock more attractive to a different class of investor. That last statement is certainly true, but it’s hard to know why Apple would care. My best guess is that dividend-oriented investors tend to buy and hold, so an increase in that class of investor could reduce some level of volatility in Apple’s stock price. Although Apple will include past and future unvested employee stock in the dividend program, Peter Oppenheimer said that Tim Cook asked that his unvested shares not be included in the dividend program.
The other half of the announcement is a stock repurchase program, under which Apple will buy back company stock in order to reissue it to employees, either in the form of grants or through the employee stock purchase plan. Presumably, Apple anticipates distributing enough stock to employees — likely an ever-increasing number — that the repurchase is deemed necessary to avoid the need to issue new stock, thus diluting the price.
During the Q&A session, in which analysts largely asked questions that Cook and Oppenheimer had said they wouldn’t answer and then didn’t, the topic of a stock split came up. Apparently, Apple has considered splitting the stock, which would reduce the price (currently about $600 per share) and increase the number of outstanding shares, but Cook and Oppenheimer said that while there was little evidence that a split would help Apple in any way, they were continuing to evaluate it.
Interestingly, all the cash that will be used for the quarterly dividends and the stock repurchase will come from cash held within the United States. Although Apple could end up with nearly $100 billion (by one analyst’s off-the-cuff estimate) in cash holdings abroad by the end of the year, current U.S. tax law makes repatriating foreign cash expensive. Though we don’t hear about Apple lobbying the government much, Cook said about this situation, “We have expressed our views with Congress and the administration.”