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Apple announced that it will finally use part of its huge cash hoard to reward its stockholders. Apple said that it will be initiating a quarterly dividend payout of $2.65 per share sometime in the fourth quarter of FY 2012, which starts July 1st.
In addition, Apple also plans to initiate a share buyback of $10 billion in the next fiscal year, which starts September 1st. All in all, the company expects to use about $45 billion in the first three years of its dividend and share buyback programs.
In anticipation of this news, Apple’s shares had shot up to $600 in pre-market trading Monday. The shares fell from the highs but still closed up over 2% on the day. Our $550 price estimate for Apple is currently around 8% below the market price.
See our complete analysis of Apple
Apple had a cash balance of $98 billion at the end of last year which leads us to believe that it has over $100 billion now. In the last four years, Apple has added around $80 billion in cash and cash equivalent reserves, close to $40 billion of which came last year alone. Apple’s cash balance accounts for more than 18% of our price estimate for Apple.
While the huge cash balance acts as a cushion for the company in the scenario that its revenues and profits take a hit due to a global economic collapse or some other reason, it also makes Apple’s stock overcapitalized with the risk that a significant amount of its resources get diverted toward managing the huge cash pile. Since Apple is a technology company, it makes more sense to return part of its excess cash to shareholders and maintain focus on its core competencies.
The $2.65 per share dividend every quarter adds up to about $10 billion every year. Over the next three years if maintained, that comes to around $30 billion. Since Apple expects to use about $45 billion in total, it is probably planning to buy back another $5 billion of its shares over the next three years, in addition to the $10 billion announced.
The share buyback will not add anything to the company’s valuation but will definitely help Apple show faith in its own performance and that reason alone could push up its market price. The dividend payout, on the other hand, reduces the company’s valuation as it uses up cash on hand to pay out investors. But it will also bring in a new set of investors/funds that have never invested in Apple before – the dividend hunters.
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