Unicorns Exist: Apple Initiates a Dividend

Would you look at that? Surely my eyes deceive me. Could it be?

Ancient books of lore have foretold of this mythical beast that hasn't been seen in nearly 17 years. No, I'm not talking about a magical one-horned horse -- although my daughter assures me that they do exist.

I'm speaking of the fabled Apple (Nasdaq: AAPL) dividend that has been the hot topic of debate and speculation for years. At long last, Apple has just announced that it is initiating a quarterly dividend of $2.65 per share, starting in its fourth quarter of fiscal 2012, which kicks off in July.

Repondez, s'il vous plait
Well, income investors, you now have a formal invitation to the iParty. As a longtime attendee, I must say it's nice and cozy in here. During today's conference call, CEO Tim Cook said that this dividend should allow Apple to broaden its investor base, and we knew a dividend was possible on Cook's watch.

That $2.65 comes out to $10.60 per share annually and represents an approximate 1.8% dividend yield, based on Friday's closing price. That yield lands it roughly in line with other dividend-paying tech stalwarts.

Source: Reuters; Morningstar. *Based on $10.60 annual dividend and current trailing-12-month earnings; actual payout ratio will depend upon TTM earnings as dividends are paid.

The last time Apple paid a dividend was back in December 1995 for $0.12 (not adjusted for the two stock splits since then). A lot has happened since then, including a near bankruptcy, the return of Steve Jobs, and a meteoric rise to become the largest company in the world by market cap.

Buffett to Apple: "I told you so"
It gets better. Apple's board has also authorized a $10 billion share repurchase program that begins in its fiscal 2013, with the primary purpose being to neutralize the effect of dilutive equity compensation. Warren Buffett told Steve Jobs that a repurchase program was a good idea years ago; too bad Jobs didn't listen.

This should help mitigate the gradual increase in shares outstanding over the years, but it likely won't be accretive to earnings. The company said the program was geared simply toward offsetting dilution with no specific mention of reducing outstanding shares.

Apple Shares Outstanding Chart by YCharts

This also sends an important signal that management still thinks there's upside, since no company would repurchase shares it thought were overvalued.

Business as usual
Backing up that notion, Cook added, "We don't see ceilings to our opportunities." He mentioned that Apple sold 37 million iPhones last quarter, but that represented less than 9% of all handsets sold during the quarter, while the handset market is expected to grow from 1.6 billion units in 2011 to over 2 billion 2015. Apple strongly believes that all handsets will eventually become smartphones, which translates into "massive" iPhone opportunities.

Cook also cited that Macs have outperformed the broader PC market for 23 consecutive quarters, and that Cupertino expects the tablet market to eventually surpass the PC market -- led by the iPad.

Where's all this money coming from?
Apple now sits on $97.6 billion in cash, although roughly $64 billion of it sits overseas. CFO Peter Oppenheimer reiterated numerous times that repatriation taxes continue to be a disincentive to bringing some of those dollars home -- which Apple has expressed to Congress. All of the programs announced today will be funded with domestic cash.

Apple Free Cash Flow Chart by YCharts

Fortunately, Apple didn't listen to this analyst, who suggested taking on debt for funding. Over the first three years of these programs, the company expects to utilize roughly $45 billion. It will also pay these dividends to employees holding restricted stock units, or RSUs, on a deferred basis until vesting, although Cook volunteered to exclude his sizable RSU holdings.

Raise your hand (or press *1) if you have a question
Here are some tidbits from the analyst Q&A that followed the prepared remarks on the conference call.

When asked about the potential for future dividend growth, Cook and Oppenheimer deflected the question and simply said that management and the board will continue to "periodically review" its plans. Longtime Apple analyst Gene Munster asked about the possibility of a stock split (the last one was in 2005), with Cook saying that the company has considered it but didn't find any compelling evidence that a split was in the best interest of shareholders and Apple. (However, he did say the company will continue to look at the idea.)

Munster tried to sneak in a question on how the new iPad launch went, even though the call was explicitly limited to cash discussions. Cook simply said that it was a "record weekend and we're thrilled with it," but he didn't elaborate beyond that.

Morgan Stanley's Katy Huberty (who thinks shares can approach $1,000) mentioned that at this rate, Apple's overseas cash alone could easily reach $100 billion by year's end, and she wanted to know how that could be deployed. Oppenheimer brought it back to those pesky repatriation taxes but generally referred to additional supply chain investments and international retail expansion.

When asked about future excess cash generation, Oppenheimer said that "most of the emphasis is behind the dividend," and that's where the majority of the cash will go, which implies possible dividend growth subject to those "periodic reviews." He expects to pay out about $10 billion in dividends in the first year, making Apple one of the largest dividend-paying companies in the US.

Growth days are not over
In many cases, the initiation of a regular dividend can signal to investors that a company's growth days are over, as it did with Microsoft a decade ago. In this case, Apple still has plenty of growth days ahead of it, and it's kicking off this dividend simply because it's beyond stupid rich. It's still keeping a "war chest" to continue using strategically in things like focused R&D, specialized acquisitions, and supply chain mastery, among others.

So now we're talking about a company that grew its bottom line by triple digits last quarter and is now also paying a dividend and repurchasing shares. What more could you ask for?

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