Apple (AAPL), which is a current holding in both the Henry Fund and Krause Fund portfolios, announced today that it would initiate a regular quarterly dividend of $2.65 per share beginning in July of 2012. The company will also repurchase up to $10 billion of its shares in the open market. This announcement has long been anticipated by Apple shareholders, and today, the stock is still up more than 2.2% on the news.
My initial reaction to the news was disappointment. I had expected Apple to borrow a page out of the Microsoft playbook and pay a large special dividend instead.
In 2004, Microsoft (MSFT) declared a special dividend of $3.00 per share and distributed a total of $32 billion of cash to shareholders. MSFT also boosted its regular quarterly dividend. At the time, MSFT was sitting on more than $50 billion of excess cash.
By comparison, as of its Jan. 25, 2012 release of first quarter results, Apple is sitting on $98 billion in cash and investments, or approximately $105 per share. AAPL’s announced dividend of $2.65 per quarter ($10.60 per year) will result in an annual distribution of just $9.89 billion, barely 10% of the company’s cash reserves. However, in its 2012 Q1 results, Apple generated quarterly operating cash flow of over $17.5 billion. For fiscal year 2011, the company reported operating cash flow of more than $37.5 billion. Thus, the company should be able to finance the newly announced dividend through current operations, and the dividend and repurchase will likely not lower the company’s large cash balances.
Huaxin Zhang, our technology analyst in the Henry Fund, recently completed her analysis of AAPL, and today, she presented her investment thesis to the team. Huaxin has a price target for AAPL of $589-618 per share. The stock is up more than 47% for the year-to-date period. During her presentation this morning, Huaxin noted that almost two-thirds (66%) of AAPL’s cash is held by foreign subsidiaries outside of the U.S. In order for the company to distribute this excess cash to shareholders, it would first need to be brought back into the U.S., where it would be subject to federal taxes. This potentially limits the amount of AAPL’s excess cash that could be used to pay a special dividend.
The initiation of a regular quarterly dividend and share repurchase program is clearly a step in the right direction. Yet, given its current sales growth projections and near-term profit forecasts, Apple will continue to face the “problem” of what to do with its large cash reserves. I continue to believe the company should distribute a large portion of its cash through a one-time special dividend.