Cook Breaks With Jobs' Apple Legacy

Tim Cook has made his first major break from the legacy of Steve Jobs by choosing to return billions of dollars to shareholders in dividends and a share buyback programme.

Apple's new chief executive had already hinted at a different path from his famously frugal predecessor, saying last year he was "not religious" about Apple's cash pile, now estimated to be well over $100bn.

His measured approach to distributing money to investors will not seem like heresy to his board, shareholders and analysts, many of whom feel that even Mr Jobs would have had to review his stance in the light of the ballooning cash position.

Indeed, Michael Sansoterra, manager of the Bridgeworth large-cap growth fund which owns Apple shares, says the return to investors has not disappointed and given such low interest rates, "Anything they do with that cash is better than nothing".

"Ultimately, what it really does is expand the shareholder base to include those investors, particularly the funds who have to have a dividend as a prerequisite [to invest]," he says.

Mr Jobs's reluctance to part with the company's cash may have stemmed from Apple's past struggles while he was not with the company which in 1995 forced management to suspend its dividend. When Mr Jobs returned to Apple a year later, it appeared close to bankruptcy.

His successors had maintained his line until now. Tim Cook said there would be no "toga parties" on his watch. But the success of the iPhone and iPad added $31bn to its cash reserves in its last fiscal year and the figure went up by a further $16bn in the December quarter alone as the iPhone 4S went on sale. Apple's cash position, which it keeps invested in securities including US Treasuries, reached $97.6bn at year-end.

Mr Cook and Peter Oppenheimer, chief financial officer, explained the change of heart on a call with analysts on Monday. First, they subtracted cash held abroad – $64bn, or two-thirds of the total – as repatriating it would make it subject to tax.

"We have expressed our views to Congress and the administration," Mr Oppenheimer told analysts. "We think that the current tax laws provide a considerable economic disincentive to US companies that might otherwise repatriate a substantial amount of foreign cash that they have."

Second, Mr Cook said Apple decided how much it needed to keep on hand to keep on making innovative products; this includes possibly making acquisitions or securing component supplies with upfront payments.

"After we had done all of that and allowed for a war chest to do things that today we can't predict," Mr Cook said, "we had extra cash left over, including plenty to run the business. Given that, we felt it would be the right action to initiate a dividend and expand our shareholder base in the process."

Apple will pay around $10bn in dividends in its first year, or about 3.6 per cent of the total forecast to be paid by S&P 500 companies in annual dividends this year. It also plans $10bn in share buybacks over the next three years. Even though the company claims the total will make it the payer of one of the biggest dividends in the US, other comparisons make it look as if it is loosening the purse strings with clenched teeth.

Apple would be the largest payer behind AT&T, whose annual dividend totals $10.4bn. But its yield is low – just 1.8 per cent, compared with AT&T's nearly 6 per cent and 263 other companies boasting higher yields, according to S&P Capital IQ. Howard Silverblatt, S&P senior index analyst, says: "Apple's yield may be criticised as low, but initiating issues have a history of lower initial rates, and then increasing within the year. Dividend funds are hot ... Apple's initiation can only add to the frenzy."

Apple gave no indication it might raise the dividend in future, only saying that this and the buyback would be periodically reviewed.

But analysts hope this could trigger a fresh look at dividend payouts by other technology companies.

"We expect to see more US companies follow Apple and those that already pay dividends will also increase their levels of payouts," says Paul Atkinson, head of North American Equities at Aberdeen Asset Management.

Apple's stock price rose to nearly $610.10, up 2.7 per cent, at the close in New York. Mr Cook also did not dash investor hopes for another 2-for-1 stock split – which would be the first since 2005, saying it is " something that we continue to look at".

For now, Apple fans weighing how to spend a hard-earned $600 might skip the purchase of a single Apple share, which pays them a dividend of only around $10 a year, and instead opt for a new 32Gb iPad for the same amount.

Additional reporting by Telis Demos, Dan McCrum, Tim Bradshaw and Richard Waters.

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