Apple's great dividend yawn

Apple has announced its plans for (some of) its cash

a woman

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Well, that was underwhelming.

After building a cash pile that could buy the New Zealand GDP for a year, and with around US$1,200 arriving every second, on the weekend Apple (Nasdaq: AAPL) finally announced it was going to do something with all that cash.

Rumours and opinions swirled, including our stab yesterday.

Dividend and a buyback

The announcement, when it came overnight, wasn't exactly earth-shattering. Apple has announced a SU$10 billion share buyback, that will be implemented over three years, and a US$2.65 quarterly dividend.

That $10.60 yearly dividend amounts to a yield of around 1.8%.

The market shrugged off the news, with Apple shares up around 2%. Not bad, but neither a huge cheer nor disappointed sell-off.

Positive news

Okay, so on the positive side, it's at least something. Apple could have done exactly the same thing it's done to date and simply kept the cash. The mountain of money would have kept growing, and investors would have continued to worry about the company's plans (and agitate to get their hands on some of that money).

Paying a dividend and instituting the buyback at least is a signal from the company that it's willing to start returning some cash to shareholders. If the cash keeps growing, it's also possible that the dividend will increase over time.

The cash will keep growing

The dividend and buyback are hardly going to change the cash situation at Apple though. In fact, the incoming cash will still dwarf that being paid out – assuming the dividend remains stable – in the next couple of years. That is, despite this decision, Apple's cash hoard will continue to grow.

My favourite line from the overnight commentary came from Liam Denning in the Wall Street Journal who said '[r]ather than raiding the piggy bank, the company is merely dropping quarters into it at a slightly slower pace'.

One thing to note is that Apple – like many other US companies – has significant cash balances outside the United States. Because of the taxation laws in that country, multinational companies have to pay tax on any cash repatriated into the US – one reason Apple has restricted the dividend so it could be paid out of its US-based cash balances.

With those laws unlikely to change any time soon, and Apple unlikely to bring the money home until they do, the cash could be stranded overseas for a while to come yet. That has raised the spectre of a large overseas acquisition, but that would be a significant departure from the Apple playbook.

A marketing message?

Lastly, the buyback is likely calculated to send a message to the market. In the lifecycle of a technology company, paying a dividend is often interpreted as a signal that the company's best days of growth are behind it. That can send a whole lot of growth-seeking investors out of a company's stock, and lead to a period of share price stagnation of worse.

By combining a dividend and a buyback, Apple is likely telling the market that while it is prepared to start handing cash back to investors, it still believes its shares are good value by effectively buying some for itself.

I would have much preferred a special 'one-off' dividend to a buyback – particularly when shares are at an all-time high. Buybacks are best used when a company's shares are significantly undervalued.

Foolish take-away

The simple reality is that if a company can't use its cash and earn a reasonable return for shareholders, it should distribute that money to its owners. From a company that famously refused to do either, a dividend and share buyback are positive – if underwhelming – signs.

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Scott Phillips is a Motley Fool investment analyst. You can follow him on Twitter @TMFGilla. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691)

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