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Is This Where Apple Should Put Its Cash?

Dan Caplinger
February 22, 2012

In theory, dividends shouldn't be big market movers. But in reality, when a company announces an unexpected dividend, investors often defy economic theory by bidding its shares through the roof. That could be the next step for the market's most valuable stock.

Apple (Nasdaq: AAPL  ) has had an impressive cash hoard for some time, and it just keeps getting larger. In its most recent quarter, the company boasted more than $97.6 billion in cash and securities. For years, Apple has resisted pressure to start paying a dividend. But as a MarketWatch report speculated, one answer could be for the company to pay a one-time special dividend -- thereby accomplishing the dual goal of returning capital to shareholders while avoiding any expectations of ongoing regular dividend payments in the future.

Why are special dividends special?
When you think about what a dividend actually does, you wouldn't think a special dividend would have any impact on a stock's price. After all, when a company pays a special dividend, it reduces its cash on hand by exactly the amount it pays out to shareholders. The net impact should be a wash.

In practice, that's often basically what happens. When VirnetX (AMEX: VHC  ) announced a $0.50 special dividend in June 2010, the stock price jumped $0.41 in the next day's trading. Yet in the ensuing trading sessions, the stock gave back those gains, so that by the time the stock actually paid the dividend, the shares were trading a lot closer to where they had been before the announcement.

But special dividends don't always work out that way. Microsoft (Nasdaq: MSFT  ) announced a $3 special dividend in July 2004, when shares traded at $28 per share. By the time the company actually paid the dividend in November, the shares had risen to around $30 -- and after the dividend, the shares traded above $27, netting more than $2 in profit for those who bought on news of the payout.

More recently, money manager Diamond Hill (Nasdaq: DHIL  ) saw even more dramatic moves. After the company announced a $5 special dividend in December, the shares jumped almost $5 on the day; over the ensuing week before the payout, the stock