Financial Policy at Apple Case writeup Essay

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Financial Policy at Apple – Case Analysis

Apple had nearly $137 billion of cash at the end of Dec 2012. Over the past few years, the Company had been highly successful with the launch of the iPhone 3G in 2008, and which was followed by the launch of iPad in 2010. The Company enjoyed high profitability, and was able to keep its costs at a minimum. The gross margin on the iPhone was between 49% and 58% from October 2010 to March 2012, and the gross margin on the iPad was between 23% and 32% in the same time period. Apple’s capital structure included no debt; hence, there was no outflow of cash for making interest payments.

However, in spite of the successes of Apple, the Company’s stock price had been dipping since reaching its high
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A reason for the high amount of offshore cash was that 61% of Apple’s revenues came from offshore locations.

In March 2012, Apple announced a quarterly dividend of $2.65 per share and a share repurchase plan of $10 billion. However, the stock price continued to fall. David Einhorn, president of Greenlight Capital, suggested that Apple should issue perpetual preferred stock that would pay $.50 quarterly dividend (or $2 yearly) based upon a face value of $50 for each share of the preferred stock. His argument was that issuing preferred stock did not require repatriation of offshore cash as the dividend could be paid from FCF. Each preferred stock could unlock $32 per share in value.

There are several ways in which Apple could deal with the varied choices that it is facing. I believe that instead of introducing a new type of capital such as preferred stock, Apple can steadily increase its dividend quarter by quarter. This will attract new type of investors to the stock i.e. those that seek regular income such as pension funds, retirees etc. Increasing dividend would also signal that the Company is confident of its future growth plans because dividends are somewhat “sticky”. A new type of investor along with greater confidence that Apple might project through its commitment to increase dividends might lead to a boost in the share price. If Apple feels that it needs to return cash right now rather than showing its
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