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Apple’s (NasdaqGS: AAPL) Dividend: Tim Cook Goes Where Steve Jobs Wouldn’t

By Chad Fraser on March 20, 2012

Apple (NasdaqGS: AAPL) took its first big step out of the Steve Jobs era yesterday, when it announced that it will soon begin paying a dividend. The company also said that it plans to spend $10 billion over the next three years to buy back its shares.

Apple plans to start its quarterly payout of $2.65 a share during its fiscal 2012 fourth quarter, which starts July 1, 2012. The shares will yield 1.8% (based on today’s price). Buybacks will begin in the company’s fiscal 2013 first quarter, which starts in October 2012.

Apple Felt the Pressure to “Do Something With all That Money”

The move marks the first time Apple has paid a dividend since 1995. It also comes on the heels of the high-profile launch of the latest version of the company’s hugely popular iPad tablet computer. (We recently looked at a number of different ways you can profit from this new device in How to Profit from the New iPad.)

In Dividend Ahead for Apple?, we recently pointed out that Apple is sitting on about $100 billion of cash and has been under growing pressure to give some of it back to shareholders. Since then, the burning question has been how the company would deploy its cash hoard: dividends, buybacks or continued investments in its business?

Given that Apple has clearly demonstrated its ability to out-innovate its competitors, would paying a dividend signal that Apple was running out of ideas for developing new products? After all, paying a dividend is a concession that the company has no better corporate use for the cash.’s Rex Crum saw the move as Tim Cook’s way of putting his stamp on Apple. Former CEO Steve Jobs, who died last November, was never a fan of dividends, preferring instead to invest in new and innovative products.

Still, some analysts thought that given the huge — and growing — cash pile and the fact that the stock has soared 48% this year alone, Apple would likely have had to offer a dividend sooner or later — Jobs or no Jobs.

Crum quotes David Rolfe, chief investment officer with Wedgewood Partners, who holds that view:

Given all the Apple products, let’s assume Jobs was still here, and they were sitting on $150 billion by the end of the year. Don’t you have to assume they would have to do something with all that money?

Did the Apple Dividend Announcement Steal the New iPad’s Thunder?

Most analysts agreed that the moves would help Apple attract more value-oriented investors. But some were disappointed that the company’s dividend yield will be lower than those of many other tech stocks, including Microsoft (NasdaqGS: MSFT) and Intel (NasdaqGS: INTC).

Still, most felt it was a good start, including’s Jim Cramer, who pointed out that:

if this stock were to come down, then you know the dividend would seem rather bountiful. No one should ever sniff at $2.65 a quarter when not that long ago the stock was in the $200s.

Cramer’s only worry was the timing of the announcement, coming right after the launch of the new iPad. Would Steve Jobs have done that? Probably not, given his legendary focus on building huge buzz around new product launches. Cramer goes on:

What bothered me was that this was a very special weekend for Apple, the weekend the iPad hit the stores, and for those of us who waited in line to get one we understood that something so special was going on that the dividend stole the thunder from the actual story, a new device that I think is taking America by storm.

Did Apple Hit the Right Mix of Buybacks and Dividends?

Something that was mostly overlooked in the barrage of media coverage was the question of whether Apple did the right thing by offering both a dividend and a buyback, or whether it would have been better off going fully one way or the other.

The question of dividends versus buybacks is often discussed here at Investing Daily. In 2010, we held a roundtable on the topic, during which our editors’ opinions largely (but not totally) came down on the side of dividends. (For a full rundown on the pros and cons of dividends and buybacks, see Advisor Roundtable: Stock Buybacks vs. Dividends).

That’s partly because, as David Dittman, co-editor of our Australian Edge newsletter, pointed out,

A dividend is a commitment, and to shareholders that means forever. If you cut it, suspend it, reduce it, or in any way mess with that commitment, for a lot of shareholders it’s all over.

A buyback, on the other hand, involves no long-term commitment. A company can cut or change its repurchasing program at any time, and it’s unlikely to affect most investors’ view of the stock. Despite what Apple said yesterday, it’s under no obligation to buy back a single share. Many companies, in fact, never use all the funds their boards authorize for share repurchases.

Studies have also shown that while buybacks tend to spur share prices in the short term, they’re often less effective at creating long-term wealth. Timing plays a big role in that, as Gregory V. Milano, chief executive of Fortuna Advisors points out:

The problem with buybacks is considerably compounded by poor timing: the propensity to buy when the price is high and not when it’s low.” Given the big price run-up in Apple stock, the company could easily be accused of doing just that today.

Analysts, for their part, were mostly concerned about the relatively small size of Apple’s buyback. Quoted in an article on CNNMoney, Shelby Seyrafi, an analyst at FBN Securities, said:

The $10B stock repurchase plan, over three years, seems a bit low for now. However, we believe that it is an initial step and it could expand substantially in the future.

Toni Sacconaghi of Bernstein Research was unimpressed with both the lower dividend yield and the “mix of the return of cash.” He said: 

For a company that prides itself on thinking differently, Apple’s announcement reflects a pretty vanilla return of cash program.

Even so, Sacconaghi reiterated his $699 price target and “buy” rating on the stock. Apple shares closed up 2.7% yesterday, at $601.10.


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