In the introduction to the chapter, we learned that Apple Computer (AAPL) recently reinstated the payment of cash dividends, which had been suspended since the 1990s. What are some reasons that might have influenced the firm’s decision to begin paying dividends again?
One of the reasons that Apple decided to start paying dividends again is because the company has grown exponentially since their decision in 1990. In accounting class, we briefly discussed this topic that Apple has almost 90 billion dollars in free cash which is nowhere near what they had earlier. Many times, when companies have matured they decide to pay out more dividends. This is because they do not have the need to withhold cash from dividends to reinvest for R&D because they are already covered with their egregious amounts of cash. Their thinking is that they could attract even more investors with a promise of steady dividends and a sign of a positive future for the company which in turn would raise the current stock price.
Apple started back paying dividend because it was profit and they were able to gain back there company this way.
Technology giant Apple (AAPL) launched a plan to pay a $2.65 fourth quarter cash dividend in addition to repurchasing $10 billion of its shares in March 2012. The combined effect of paying the dividends and repurchasing the shares is $45 billion! Interestingly, this is not Apple’s first dividend payment. The firm paid dividends for 8 years, ending in 1995 when a worsening business outlook led the board to discontinue the dividend.1 At least for the time being the dividend payment looks very secure as Apple expected to add some $35 billion to its cash holdings during 2011 even after paying dividends and repurchasing shares.
The cash distributions represent the return on the investment made by the stockholders. As such these distributions are tangible evidence of the value created by the firm for its owners. But not all companies distribute cash either as dividends or share repurchases. Apple, for example, did not distribute any cash during the early years of the company’s life when it was growing rapidly and needed all its internally generated earnings to support its growth. (Keown 416)