Apple's New Dividend

Starting in July, Apple pays a quarterly dividend of $2.65 a share. At Apple's high-water-price of $600, the annual rate of this dividend ($10.60) amounts to just over 1.75%. At the $590 price printing around the time of this post, it's about 1.8%.

Commencing at the end of September, Apple will also repurchase shares from the open market under a buyback program with a $10B budget over 3 years. The primary goal of the repurchase program is to neutralize dilution caused by employee incentive programs that involve printing shares. $10B is about 1.8% of Apple's current market cap of $555B.

Apple's thinking on its use of cash has been interesting. According to Tim Cook on the conference call, Apple first concentrated on U.S. cash holdings, because of the negative tax impact of importing foreign-earned funds. Apple then took stock of its expected capital needs, and added some buffer for opportunistic acquisition, and worked out what it expected to be able to return to shareholders. This sort of thinking is interesting because it makes no grandiose assumptions about the relative capability of Apple and its shareholders to make productive use of otherwise idle cash. It also identifies the cash Apple isn't employing for its business purposes so that shareholders aren't paid funds Apple really can employ for business. This satisfies the concerns raised by Warren Buffett in his letter to shareholders in Berkshire Hathaway's 2011 Annual Report (e.g., at p.99-100).

After determining how much money Apple would return to shareholders, it did a strange thing: instead of making a decision about the value of Apple shares vs. the value of cash, Apple decided to pay a dividend because – as explained by Tim Cook – this is what shareholders wanted. Personally, I'd have preferred the tax-efficiency of share buybacks, and the impact over time of share buybacks in the face of continued business growth. But it's hard to fault management for doing something because its owners ask. The fact Apple has $10B dedicated to what amounts to a dilution-prevention program is sort of concerning: can't they get loyalty for less than $10B? They should call Buffett back to get notes from his shareholder's letters.