Apple Inc. (Nasdaq: AAPL) has finally decided to reward investors beyond the total return on their shares, which was 77 percent over the past year before Monday's market open, and 554 percent since 2007.
Here are five reasons CEO Tim Cook decided on this new course for the Cupertino, Calif., developer of the Mac, iPod, iPhone and iPad as well as iTunes and iCloud.
Apple is swimming in cash. As Cook said in a Monday call, We have plenty of cash to run our business from cash flow on sales of new products. Holding cash and investments exceeding $97.6 billion looks bad and isn't necessary.
Besides rewarding shareholders, Cook also wants to reward employees who own stock or have been rewarded restricted stock units. Chief Financial Officer Peter Oppenheimer said there were 17.7 million of these outstanding in the most recent quarter alone.
Apple will declare a $2.65-a-share dividend when it announces third-quarter results in July and start buying back shares in October. So each share gets a dividend and fewer outstanding shares means everyone benefits.
Apple has about 934 million shares now.
Other companies pay dividends. Apple now wants to broaden its shareholder base, both Cook and Oppenheimer said. Adding a dividend opens Apple shares to pension and mutual funds that seek dividend growth as well as capital gains.
For years, Apple's technology rivals such as IBM (NYSE: IBM) and Hewlett-Packard NYSE: HPQ) have paid dividends, although IBM suspended them during its financial crisis.
Apple's business is generating cash. Cook declined to say how many new iPads were sold over the weekend. It was a record weekend and we're thrilled about it, he said as he dodged sales questions. Analysts estimate as many as 2.5 million new iPads were sold.
Given current demand, Apple will keep generating more cash, so telling investors a dividend and buyback is ahead keeps them happy. Cook said the company has innovative products coming.
Embarassing circumstances. Cook in February hired the industry-created Fair Labor Association to examine working conditions at Chinese factories contracted to manufacture Apple products. That was before a flap over public radio's This American Life program, which recently retracted a broadcast about conditions in those factories while noting that other news outlets, and Apple itself, have reported possible labor violations at the sites.
With directors including former vice president Al Gore, Apple needs to demonstrate corporate responsibity especially as it's entering the corporate market via the back door: employees of enterprises that use IBM and H-P servers are using iPhones and iPads to access company information.
Maturity. Founded in 1975 and incorporated a year later, Apple is now a mature company as well as a global brand. So paying a dividend comes with the territory, along with a buyback similar to many others in technology, as well as among the Fortune 500.
Apple's initial public offering, after all, was conducted on Dec. 12, 1980, when each share sold for $22. Shares were split in 1987, 2000 and 2005. Cook said Monday he's open to another at some time.
Apple shares closed at a record $601.10, up $15.53 or 2.65 percent on Monday.