Apple dividend benefits income funds

Funds, not retail investors, are the big beneficiaries of the payout.

(Photo: Photo: Elwood J. Blues/Wikimedia)

You have to know that Tim Cook, Apple Inc.’s new CEO, will never win, competing with the ghost of founder Steve Jobs. He’s overseen two product launches since his late former boss stepped down last August: the iPhone 4S and the new iPad, neither a significant improvement over its predecessor. But his biggest moment so far had nothing to do with technology. On March 19, he revealed that Apple would start paying a dividend to its shareholders.

The announcement didn’t surprise the markets—many had pushed the company to give back to shareholders some of the US$100 billion it has stashed in its bank account—but it does signal a shift in direction. Many observers think the $10.60 annual dividend (1.8% yield), plus $10 billion in share buybacks, would never have happened were Jobs still in charge. “I don’t think it’s a coincidence it occurred now,” says JP Scandalios, a portfolio manager based in San Mateo, Calif., with Franklin Advisers Inc.

It’s hard, though, to see how Jobs could have held onto that giant pile of cash much longer. It was a drag on Apple’s return on equity, for one thing. For Michael Kagan, a portfolio manager with ClearBridge Advisors, the main benefit is that a dividend reduces the risk of a bad decision. “When you have too much cash, there’s a temptation to make a large, unrelated acquisition,” he says. “And that can be value-destroying.”

As much as investors wanted a dividend, the payout won’t significantly increase their return. The company is still experiencing incredible growth—it’s revenues rose 73% year-over-year in Q1 2012—which means capital gains still account for the vast majority of the stock’s ROI. In nearly three months, the company’s stock has climbed by about 48%, and many people think shares will soon reach US$700, up from $600 now.

Canadian retail investors may not see the full dividend anyway. Foreign payouts on stock held in a non-registered account are subject to a 15% U.S. withholding tax; it’s money you won’t get back. Ian Ainsworth, a portfolio manager with Mackenzie Investments, says that it would have been better for Canadians if Apple concentrated on raising its stock price—for example, by splitting its stock, which would lower the share price and possibly increase demand—so we could get more tax-efficient capital gains.

For now, the big winners are income funds, which can now own Apple because it pays a dividend. It’ll be portfolio managers who scoop up new stock because of the payout, says Mike Abramsky, an analyst with RBC Capital Markets, not retail investors focused on its cheap multiple—it’s trading at 13.5 times earnings—and growth potential.

While it’s never bad to get a dividend, it’s hard to tell if it will continue to rise. Scandalios expects that Apple, which is starting to mature and will, eventually, see growth slow, to continue increasing its yield. But it’s unclear if that will happen annually or just once in a while. “This is new to them, and they have to get comfortable with it,” he says.