A Billion Here, A Billion There: Why Apple Is Returning Half of $100 Billion Cash Hoard to Shareholders

$100 billion is a lot of spare change.

Apple announced today that it is returning @$45 billion of its $100 billion in cash to shareholders in the form of dividends.

Why it is doing so provides some insights into the company's position and strategy. Steve Jobs always believed in control. He liked having the cash available for its potential as an acquisition war chest and as a form of intimidation. 'How do you like me now - and what are you going to do about it? ' seemed to be the message to all former, current and future detractors or competitors.

But the financial reality is that $100 billion is far more than Apple will ever need for an acquisition. And is far more than it needs to continue funding the product development juggernaut that has made the company among the largest and most profitable in the world. There is a 'law of big numbers' issue companies face when they attain a certain size. Microsoft and Google both hit that wall, as have many others outside the tech arena. The 'law,' as it were, means that growth for larger companies is harder to achieve because the numbers are so much more gargantuan.

By establishing a dividend, Apple attracts investors, particularly retirees, pension funds and the like whose need for current income surpasses their demand for growth. It broadens the shareholder base and locks in a steadier, less transactional investment type.

And by letting go, Apple also signals that it is going to manage its growth, a message the financial markets always like to hear. Is there a downside? Possibly, but the stock, currently at @$600, was up $6 today so it may take a while to hear what that might be from the naysayers. JL

Todd Wasserman reports in Mashable:

Apple on Monday announced a solution to an enviable problem: Too much cash. But does giving money back to shareholders in the form of dividends make sense? Why not hoard it?

There are several reasons Apple is giving dividends, but the primary one is that investors feel they have a right to some of Apple’s $100 billion.
“People expect a return on their investment,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “If you can’t do anything with the money, then you should give it back.”

Elson says that Apple is not the only company to deal with this issue. At some point, every successful public company will get pressure to give money back. (Before the recession, Exxon Mobile, Dell and Pfizer, among others, got the same kind of pressure from investors to give back their cash or find a way to invest it.) In Apple’s case, closing in on $100 billion seems to have triggered a call to launch a dividend for investors, but there’s usually no benchmark for such decisions. “It’s all up to the judgment of the board,” says Elson.

Tim Bajarin, president of Creative Strategies, says $100 billion is way more than Apple needs, so it doesn’t make sense to keep all that money on hand. He points out that even after the company pays out its $45 billion in dividends, Apple will still have more than $50 billion in cash plus whatever it puts aside in the future. “They’ll always have cash for even big acquisitions if it enhances their position,” says Bajarin, who expects Apple to start buying more companies.

During the call with analysts Monday morning, Apple CEO Tim Cook repeatedly stressed that the dividend would also attract new investors. With a share price of $600, drawing new shareholders doesn’t seem like an issue, but Bajarin notes that there’s a type of investor that is primarily concerned with dividends. “Most of the guys buying [Apple stock] today are buying on a holding basis,” says Bajarin, who notes that such investors believe Apple is a good long-term buy. “But there are a lot of people who buy stock only on a monthly basis.”

Another point Bajarin emphasized is that some 65% of of Apple’s cash is based outside the U.S. Merely bringing that money — now housed in foreign banks — back to the U.S. would force Apple to lose cash in taxes and other fees. “Apple’s not the only one,” he says. “No corporation wants to bring money back to the U.S.”

Known for its dramatic product introductions, Apple’s Monday morning announcement will probably seem ho-hum for non-investors. But, based on Apple’s stock performance Monday morning, the company has at least prompted a squib of excitement among its intended audience: At press time, the company’s stock was up about $6 or 1% at the iDividend news.