Apple Inc. (NASDAQ:AAPL) has been sitting on a mountain of cash for ages. As of its most recent earnings report in January, that stockpile included $30.1 billion in cash and short-term investments and $67.4 billion in long-term investments.
Rumors have always swirled around what Apple was planning to do with that money. Buyouts, crazy new product developments and a dividend have been on the radar as moves Apple could make — or should make, according to certain stockholders.
This morning, Apple finally put the speculation to rest. It will pay a dividend of $2.65 per share quarterly, first payable on July 1, for a yield of around 1.8% at current pricing. Apple also will repurchase up to $10 billion in stock.
Apple’s decision to pay a dividend is a big deal for a number of reasons — and some say the resulting changes could hurt its growth prospects.
If you want to be alarmist, you could see this as a sign that Apple is at risk of becoming very much like Microsoft (NASDAQ:MSFT) … though that’s admittedly more hyperbole than fact.
Still, it’s worth noting how things have changed — and will change even more — in the years ahead for Apple.
Apple Admits Business Has Matured
For starters, the simple move to deliver cash back to shareholders is an admission that Apple has reached a certain level of maturity in its business. This is the most significant development of all for many investors, and hints growth may be harder to come by.
Consider that the vast majority of high-flying tech stocks do not pay a dividend, because they prefer to invest in their own business. This is true for tiny software companies as well as for some of the biggest names in tech.
Case in point: Google (NASDAQ:GOOG) does not pay a dividend. In fact, the search giant’s $12.5 billion buyout of Motorola might not have been possible if it started bleeding down its cash years ago with a dividend. Another good example is Amazon (NASDAQ:AMZN), which has committed billions in research and production costs to its Kindle e-reader. Amazon is bleeding so much cash that the giant tech stock basically will break even in the current quarter. If Amazon was paying out hundreds of millions in dividends, that kind of investment in itself would be impossible.
Bottom line is that if you do the math, Apple’s $2.65-per-share dividend is a stunning $2.5 billion per quarter — $10 billion annually. Imagine the buyouts or research you could do with that chunk of change. Instead, Apple is giving that cash back to shareholders.
The Risk of Buyback Backfires
The buyback plan echoes this sentiment. A press release Monday said Apple has also authorized a $10 billion stock repurchase plan that will begin in September and last as long as three years. The primary objective is “neutralizing the impact of dilution from future employee equity grants and employee stock purchase programs.”
Stock buybacks are old hat for many Wall Street megastocks. Cynical investors say that is because it’s a common way to juice earnings-per-share numbers. By reducing the number of shares outstanding by buying them back, EPS numbers rise by virtue of simple math — not by growth.