Tuesday, 20 March 2012

A slice of Apple pie

Apple CEO, Tim Cook. Image copyright: Valery Marchive (LeMagIT)
Apple’s announcement regarding a dividend payment and share buyback programme marks another stage in the road for US tech giants in returning more cash to shareholders. Indeed, Apple was one of only two such companies that did not pay dividends (Google being the last). The continuing pressure from institutional investors combined with a new leader at the helm (Tim Cook) provided an opportunity for Apple to rethink its strategy concerning its $100bn+ cash surplus.

The dividend equates to around a 1.8% yield. Whilst this is not particularly high in the grand scheme of things, it does open up the company’s shares to income funds. This, plus the share buyback programme, adds further support to the price. The sheer amount of cash held overseas no doubt tempered the dividend level to an extent, as cash repatriated to the States incurs a tax charge.

The US has traditionally been a capital appreciation focused market in comparison to the UK. This change in Apple’s policy in conjunction with other large US companies perhaps represents a slight but growing shift towards a total return focus. We welcome this evolution, as additional dividend yielding opportunities beyond Europe are likely to benefit our clients’ diversification.

On a sector level, this shift perhaps also represents a more sustainable and much smaller tech re-rating than in the late 1990s and early 2000s, when very few tech companies paid dividends and their PE ratios were sky high. Some companies’ PE ratios are again relatively high (most notably in the cloud and mobile computing space), however a number of the companies from the original dotcom boom have not only survived but have flourished over the last decade or so and are now paying sustainable and growing dividends.


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