At the end of 2011, Apple had a very enviable problem. It's not too many companies that have more cash than they know what to do with, and for the electronics giant, that amounted to nearly $100 billion burning a hole in its pocket.
So it certainly pleased current and potential investors when Apple announced that, for the first time since the mid-1990s, the company will start paying a dividend.
To appreciate the scale of Apple's conundrum, consider that in the last three months of 2011, the company was generating more than $1 billion in profit free and clear each and every week.
By the end of the year, it had enough cash on hand to buy Goldman Sachs outright; even after that it would have had almost enough cash left over to buy General Motors as well.
It's not that Apple has not been spending — it has. But over the past few years the company has spent several billion dollars locking down critical parts and supplies for the iPhone and iPad. It spent several hundred million buying the company that created Siri, the voice command program on the iPhone, and a couple of other small startups.
Apple also spent aggressively opening dozens of new stores around the world.
"Even with these investments we can maintain a war chest for strategic opportunities and have plenty of cash to run our business," Apple CEO Tim Cook said on a conference call Monday. "So we are going to initiate a dividend and share repurchase program."
Boon For Investors
Starting later this year, Apple will spend about $5 billion annually buying back its existing stock. This stock buyback program is relatively small, and really just intended to offset any new stock that Apple gives out to its employees.
Apple will also begin paying a dividend of $2.65 a share this summer. That will cost the company about $10 billion in cash each a year.
"It really opens the stock up to a much broader group of investors, principally value- and dividend-oriented mutual funds," says John Lutz, who has helped manage a mutual fund that's been invested in Apple for years.
Apple's stock price has been rising so fast that a lot of institutional investors like Lutz can't really buy any more.
"It's a problem a lot of growth managers have," he says. "For us they are simply capped out in terms of how large a position Apple can represent in their portfolio."
The idea being that it is too risky to put all your eggs in one basket, even if the basket is named Apple.
But by paying a dividend, a whole new group of institutional investors can start buying this stock. These are folks who cater to retirees and other people who need to earn some income from their investments.
Peter Oppenheimer, Apple's chief financial officer, says the company will soon pay out more than $2.5 billion to investors every quarter, which he says would make Apple "one of the highest dividend payers in the United States."
No End In Sight
As a percentage of its earnings, however, Apple is paying less in dividends than other technology giants like Microsoft and Intel. Most analysts expect the cash to keep piling up, and by the end of the year it's likely that Apple will have more than $100 billion stashed away in offshore accounts.
Cook said Apple had a record-breaking weekend of iPad sales, and later in the day Apple announced it had sold 3 million of the new tablets since their launch on Friday.
Apple's stock price is up tenfold in the past six years. And it's up because, as fund manager Lutz says, "they have been absolutely knocking the cover off of the ball."
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