Cook Bets Apple Will Avoid Fate of Slower-Growth Peers

(Corrects amount of Apple’s cash in second paragraph of story that ran March 20.)

Apple Inc. (AAPL) Chief Executive Officer Tim Cook is betting that his company can keep cranking out best- selling gadgets even while paying a dividend, avoiding the fate of peers that return money to investors yet grow more slowly.

Cook said yesterday that Apple will dip in to its $97.6 billion in cash and investments to pay investors $2.65 a quarter for each share owned. The Cupertino, California-based company also instituted a $10 billion share-buyback program.

Dividends are often associated with companies that have matured past a rapid-growth phase and get more mileage from returning cash to shareholders than using it to generate innovative products, said Lee Pinkowitz, an associate professor of finance at Georgetown University in Washington. Apple, with a steady flow of electronics that have transformed the way people compute and communicate, is an exception, he said.

“There is this view that dividends are an admission of defeat,” said Pinkowitz. “Apple is unique. It has gotten to that point as a victim of its own success. They have so much cash and are making it faster than they could spend.”

Apple boosted sales 68 percent in calendar 2011, compared with 2 percent at AT&T Inc. (T), 8 percent at Microsoft Corp. (MSFT) and a decline at General Electric Co. (GE) All pay dividends.

Photographer: David Paul Morris/Bloomberg

Tim Cook, chief executive officer of Apple Inc., with the new iPad in San Francisco on March 7, 2012. Close

Tim Cook, chief executive officer of Apple Inc., with the new iPad in San Francisco on March 7, 2012.

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Photographer: David Paul Morris/Bloomberg

Tim Cook, chief executive officer of Apple Inc., with the new iPad in San Francisco on March 7, 2012.

While Apple is more than 30 years old, it has undergone rapid growth in recent years after the introductions of the iPhone and iPad. Since the iPhone debuted in January 2007, the stock has risen more than sevenfold. The company’s cash pile grew by 62 percent last year alone.

Growth, Plus Dividends

Apple, the world’s most valuable company, is attempting to heed investors’ concerns that it was hoarding too much cash while avoiding the perception that it’s no longer a growth company, said Giri Cherukuri, a portfolio manager at Oakbrook Investments LLC, which holds Apple shares.

“It’s big enough to satisfy investors and for Apple to continue to maintain that it’s a growth company,” said Cherukuri.

Cook said Apple will continue to thrive by expanding abroad, adding new business users and adding new customers for its line of Mac computers.

“We don’t see a ceiling” for the company’s growth prospects, Cook said on a conference call yesterday. Surging global demand for smartphones will result in continued growth for the iPhone, Apple’s top-selling product, while the iPad is the market-leader in tablet sales, he said. The Mac business is outperforming the broader market, and Apple is building an enterprise sales force to lure new business users, Cook said.

‘Extremely Confident’

“The growth speaks for itself,” Cook said on the call. “I am extremely confident in our future. The pipeline is full of stuff and I think our customers are going to be incredibly pleased with what they see coming out.”

Analysts predict Apple’s shares will continue to rise. At least four analysts have increased their price targets for Apple to $700 or higher in recent weeks. Morgan Keegan yesterday raised its price target for Apple to $800.

Apple climbed to a record $601.10 yesterday in New York, leaving the year-to-date gain at 48 percent.

The buyback and dividend will cost Apple about $45 billion over three years. Even so, the company will be adding about $30 billion in cash per year to its balance sheet, according to Toni Sacconaghi, an analyst at Sanford C. Bernstein & Co. Apple may have more than $200 billion at its disposal by 2015, he said.

Apple co-founder Steve Jobs, who died in October, had long resisted calls to return some of the money to shareholders, saying that the company was keeping its “powder dry” in case an opportunity emerged.

Temptation to Waste

Cook, after taking over as CEO, signaled more willingness to listen to shareholders and said earlier this year that Apple had more money that it needed to run the business.

Apple’s dividend was “inevitable” and its size will likely grow as the company adds more cash to its balance sheet, said Harry DeAngelo, professor of finance at the University of Southern California in Los Angeles. He said linking a dividend with a company’s growth prospects is an “inappropriate way of framing” the issue.

“The cash influxes are so huge that at some point you have to ask does it make sense to keep accumulating their cash internally,” DeAngelo said. “The answer is an unequivocally no. When too much cash builds up, there becomes a temptation to waste it.”

To contact the reporter on this story: Adam Satariano in San Francisco at asatariano1@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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