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Analysts, investors applaud Apple's plan for cash hoard

A man looks at his Apple iPad in front an Apple logo outside an Apple store in downtown Shanghai March 16, 2012. REUTERS/Aly Song
A man looks at his Apple iPad in front an Apple logo outside an Apple store in downtown Shanghai March 16, 2012. REUTERS/Aly Song© Aly Song / Reuters / REUTERS

News that Apple will start using its enormous cash pile to pay a quarterly dividend to shareholders was greeted positively by analysts and investors Monday.

The technology powerhouse, which released the latest version of its iPad last week, was widely expected to start paying out some of the $98 billion it has in cash to investors. As Apple’s cash hoard has grown, investors and analysts have clamored for the company to return some of it to shareholders.

Peter Misek, an analyst at Jefferies, said via e-mail that analysts had expected Apple to start paying dividends in the second quarter.

“[The] buyback we did not expect,” he added, referring Apple’s announcement that it will spend $10 billion on a stock repurchase program. He said the decision is both good for current shareholders and for the long-term strategy for the company.

“They’re trying to position themselves for the long haul,” Misek said. Although analysts aren’t predicting a slowdown in Apple’s ability to rake in huge profits anytime soon, it’s an eventuality James Kelleher says Cook and company are smart to start addressing now.

“They want people who don’t want to drop the stock when its revenue growth eventually crests,” Kelleher said.

Analysts said the dividend announcement has the potential to draw new investors into Apple’s stock without alienating the existing growth-based investors.

“It’s an announcement a certain type of investor wanted to hear,” said Rob Wilson, an analyst at Tiburon Research Group in San Francisco. “Many ‘value’ investors/funds were precluded from buying AAPL stock since there was no dividend/buyback.”

However, Michael Sansoterra of the RidgeWorth Large Cap Stock fund, which owns Apple stock, said one negative for Apple is the stock has appreciated so much that some fund managers are moving closer to the limits on how much of a single stock their fund can own.

“We will trim the stock when we reach those numbers,” he said.

Given that a sizable portion of Apple's cash stash is overseas, Andy Hargreaves, senior research analyst at Pacific Crest Securities, said Apple had clearly made sure the size of its dividend didn’t mean it would have to dip into its overseas funds and pay hefty reparation taxes.

“They wanted to make sure their cash return strategy had no impact whatsoever on operations,” he said. 

The dividend will cost Apple about $10 billion each year -- less than the cash it generates annually, so the company’s cash position will continue to grow, but at a slower rate. Apple said it generated about $31 billion in cash in its 2011 fiscal year.

Apple’s share price is up 391 percent since the first iPhone was released in June 2007. It hit the $600 mark for the first time last week ahead of Friday’s release of the new iPad, having closed above $500 for the first time on Feb. 13. Just before Christmas, on Dec. 23, it closed above the $400 mark for the first time.

Scott Sutherland, an analyst at Wedbush Securities, thinks Apple’s share price can go higher still. He has Wall Street’s highest price target for the company’s stock -- $750 per share. Sutherland sees future growth driven by continue strong earnings growth over the next few years and the expected introduction of new products.

“There’s a lot of market share to grow,” he said. “And markets like smart phones and tablets continue to have strong growth.”

Martha C. White contributed to this report.

Related:

Apple to begin paying quarterly dividend of $2.65 a share