Spending Apple's 'rainy day' money

Apple is set to pay its first shareholder dividends in almost 20 years, marking a distinct break from the late Steve Jobs' “no dividends” policy.

The world's biggest corporation by market capitalisation – now worth $US560 billion – will spend $US45 billion of its enormous $US100 billion cash stockpile, paying $US2.65 per share, commencing in Apple's fiscal fourth quarter (September 2012). Apple will also engage in a share buy-back scheme, totalling $US10 billion.

To a certain extent, Apple has caved to shareholder pressure; investors have long urged the company to deliver dividends back to shareholders. Former CEO Steve Jobs always resisted dividend pay outs, arguing Apple needed “rainy day” money in case the computer maker needed to burn cash during a downturn.

To pacify shareholders, Jobs delivered stock splits instead, increasing the value of existing portfolios, while encouraging new investors to buy new, cheaper Apple shares.

The Cupertino,California company will be forced to use its domestic cash to implement the dividends and buy-back schemes. The bulk of Apple's treasure chest is held offshore in cash and short-term investments. Like Microsoft and Google, Apple is refusing to repatriate billions of dollars, unless it receives a tax holiday.

During an presidential election year, when corporate taxes remain a controversial domestic issue, Apple and other tech behemoths have powerful friends in US Congress who argue that up to $US1 trillion could be invested in US jobs, if the Obama administration relaxed tax rules, even temporarily.

Multinational tech firms like Apple and Google generate tremendous profits from their global revenues, particularly in markets such as Europe, Japan and China. However, their cash stockpiles are double-edged swords, as they cannot repatriate their cash without facing substantial tax bills in the US.

However, critics argue that when tax holidays are granted, they do not make substantial contributions to jobs growth. Under the provisions of the US Homeland Investment Act (2004), passed by a Republican-majority Congress, US firms repatriated over $US350 billion. However, subsequent studies have demonstrated that corporations employed the cash largely to engage in shareholder payouts, rather than new investment in plant or R&D.

Nevertheless, it's not as if shareholders don't spend, save or invest at least some of their earnings in the US. Consequently, it's scarcely surprising US lawmakers want American corporate cash repatriated, rather than sitting in a bank in Brussels.

Apple will use a significant part of its $45 billion to pay for current and future executive stock options and employee share purchase options. In January this year, CEO Timothy Cook was granted $US376 million in stock options, worth even more since Apple's share price surpassed $US600.

At the end of 2010, CEO Steve Jobs held over 5.5 million in Apple shares in a trust, valued at almost $US1.8 billion, although he never realised the value of them prior to his death in October 2011. Conversely, CEO Cook, former Chief Financial Officer Fred Anderson and dozens of other Apple executives have realised tens of millions of dollars after exercising share options over the past 10 years, without ever delivering dividends to shareholders.

Investing in Apple just became much more attractive to mutual funds, as well as individual shareholders, and AAPL has risen $15.53 (2.65 per cent) in the few hours since the dividend was announced. Under Jobs, Apple delivered innovation, growth, revenue and astounding stock price growth; under Cook, shareholders may get some value.

Remy Davison is a Senior Lecturer in International Relations and the Deputy Director of the Monash European and EU Centre.This article was orignally published on The Conversation on March 20. Republished with permission.