Siri, Will Apple Announce A Dividend?

     Apple is going to have a big announcement tomorrow morning at 9:00 a.m. New iPad? iOS 6? Apple TV? No, Apple will be talking about their gigantic hoard of on hand cash and will "announce the outcome of the Company’s discussions concerning its cash balance." Apple's wallet doesn't have a couple of twenty dollar bills and a few moths, but close to 100 billion dollars on hand. I'll just let that sink in for a moment with this explanation by Dr. Evil...

A lot of people (mostly those who hold Apples stock) have been calling for Apple to issue a dividend, or cash payment to those who own shares in the stock. However, that being tomorrows outcome seems unlikely for a few reasons.

1. The Check is in the Mail

      Most of Apples cash is held abroad in foreign markets, and has been avoiding the watchful eye of the United States tax man. At last estimate, over 66% of Apple's cash is help abroad. If they were to bring some or all of that cash back home to the U.S.A., it would be hit with a 35% tax once it hit American soil. 

     Lets just put some numbers to that scenario. At last count, Apple has $97 billion in cash reserves. Let's assume that 2/3 of that is abroad and would be brought back. That's $64 billion itching to taste American Apple Pie. However, the IRS will take 35% of that sum upon landing, leaving Apple with around $42 billion that can be effectively brought in to the US. That would leave Apple with about a cash hoard of $72 billion. Nothing to sneeze at. However, Apple doesn't hold all of that in cold hard cash, but some is in short term assets that they might not be able to get the whole return on. In addition, this cash is in foreign currencies, so exchange rates will also eat away at some of the hypothetical repatriation. So lets be conservative and say that Apple could have $67 billion at their use tomorrow morning if they wanted it.

2. The Price is Right

     The average dividend yield for a company on the S&P 500 is around 2% a year. (Dividend yield is the dividend divided by the price of the stock) So lets play the assumption game again and say that Apple goes and declares a 2.5% dividend, which has been suggested. Apple has a current share price of $585.57 and has been climbing, with its price up over 40% this year. In order to get a 2.5% yield, Apple would have to pay each and every shareholder $14.65 for the year. How many shareholders does Apple have you might ask? They have 932,370,000 shareholders as of the last quarter. So at a price of $14.65 times 932,370,000 shareholders, Apple would need to pay out $13,659,220,500 to its shareholders. That would be 40% of Apple's cash holdings in the United States and 20% of Apple's hypothetical cash holdings if everything was in the US.

3.  Hit Me Baby One More Time

         So Apple goes ahead and announces a dividend yield of 2.5%. Whats that going to do to its share price? It will shoot up, and continue to increase, as Apple turns out record breaking quarter after record breaking quarter. If Apple is serious about keeping a yearly dividend, and does not want to lower the dividend yield, they will have to keep increasing the cash dividend they pay out, costing them more and more cash. Lets assume that Apple goes up to $650 and they want to declare a 2.5% dividend again. That's $16.25 a share and a total cost of $15,151,012,500. A company can't just hit it and quit it on a dividend. They have to keep a constant dividend payment in order to keep shareholders happy. Even if Apple is a cash generating juggernaut, they can't keep up an untenable strategy of increasing their dividends year after year.

4. It's Bad Business

     If Apple goes ahead and declares the hypothetical cash dividend of 2.5%, that is over 40% of their US cash holdings. A company needs to have good cash management, and keep enough cash on hand to be able to weather any unforeseen circumstances that may occur. Taking a huge 40% bite of their US cash pile would force Apple to bring some foreign cash back to the US, where it will be taxed at the highest rate in the world. If Apple does not need to bring back any cash (and they do not), why would they if the circumstances are not in their favor?  Other companies can afford to declare dividends because they are much smaller and a 2% yield is a much lower cost. However, larger companies like Berkshire Hathaway, can never declare dividends because of its prohibitive cost to the company. Furthermore, Peter Oppenheimer has been the CFO of Apple since 1997, a year after Apple last declared its dividend. Why would he decide to have such a change of heart now, as opposed to in other years with a equally large cash pile?

    I fully believe that Apple will announce that it has made an acquisition or that it will continue to use its cash for investing in the company or even share buybacks, increasing the share price and earnings per share. Only one way to find out.... Tune in tomorrow morning bright and early.