Does Apple Dividend Signal End of Growth?

by Jeff Reeves | March 19, 2012 9:51 am

Apple Inc. (NASDAQ:AAPL[1]) 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[2]) 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[3]), 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.

Sometimes those buybacks are just a waste of money, too. Consider that since 2006, Microsoft has spent almost $80 billion on share buybacks, including a current $40 billion buyback program that runs through 2013. The stock has mostly flatlined when you back out the strong year-to-date rally of 25% in about three months.

Apple’s corporate line makes sense, to a point. The buyback of shares will keep the number of outstanding AAPL shares constant as new stock is issued to insiders. But come on, do we really expect Apple to dish out $10 billion in stock awards? That’s a huge chunk, so Apple will be able to cover that balance and much more.

Don’t Panic: Apple Will See Few Short-Term Changes

This is not to say Apple is doomed to die a slow death. In the conference call Monday, Apple focused a lot on investments in R&D and acquisitions and retail. This year alone, Apple is opening 40 new locations.

“We don’t see ceilings for our opportunities,” CEO Tim Cook told reporters. “Innovation is the most important objective at Apple, and we will not lose sight of that. These decisions will not close any doors for us.”

Cook also said Apple will have a war chest for future acquisitions and developments. That’s believable, since $100 billion in hard cash on the books and the wildly profitable iPhone and iPad will continue to generate no shortage of future profits. So don’t think that by next year Apple will be a slow-and-steady stock that sees only incremental growth.

But let’s be honest: The company has just committed one-fifth of its stockpile — $20 billion — to dividends and repurchases. That’s no mean sum even if Apple has plenty of cash leftover and has plenty of profits to support these moves for many years to come.

The dividend and buybacks deliver a form of value to shareholders, but clearly Apple has decided it is going to look beyond just growth. That’s prudent, considering the size of its current operations.

To be clear, Apple surely will keep growing. Its recent iPad relaunch will increase its stranglehold on the tablet market. The iPhone is a $50 billion business annually, so this gadget alone provides the cash flow for the ambitious dividend and stock repurchase plans. This isn’t the end of the road by any stretch of the imagination.

But over the next several years, you can expect some slow but serious changes in Apple’s approach. The shareholder base will change and dividend investors will get more involved. The balance sheet will evolve as these huge commitments take up a bigger part of the company’s operations.

And now that Apple finally has declared a dividend, it will have to deal with demands to increase that dividend. After all, its payout is only 25% of profits — and historically, the S&P 500 companies offer around a 50% dividend payout ratio.

In short, these recent dividend and buyback moves will slowly begin to change how Apple stock is perceived by investors and how corporate executives operate this publicly traded company.

So don’t be surprised if five or 10 years from now, Apple has a lot more in common with Microsoft and other mature tech stocks than it does with innovative, high-growth startups.

Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[4] Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned securities.

Endnotes:
  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  4. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/Frugal-Investors-Finding-Stocks-ebook/dp/B007KB9CSI/ref=ntt_at_ep_dpt_2#reader_B007KB9CSI

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