Apple today cleared up some of the mystery surrounding its close to $100 billion (and growing) cash hoard. The company announced it would institute a quarterly dividend of $2.56 per share and buy back as much as $10 billion of its own stock in the next fiscal year.
The announcement of a small dividend — about $10.24 on an annualized basis, or about 1.8 percent — is hardly earth-shattering news. But it does hold some important portents.
Companies have been compiling, stockpiling and hoarding cash in the bull market (which started in March 2009) and in the current expansion (which started in July 2009). Pretax corporate profits, which stood at $1.25 trillion in 2008, soared to $1.8 trillion in 2010, and through the first three quarters of 2011 were running at an annual rate of $1.93 trillion. Companies used these profits to improve their collective balance sheets. According to the Federal Reserve, cash holdings of U.S. companies, which fell to $1.4 trillion in 2008, have risen in pretty much every quarter since the end of 2008 — to $1.86 trillion at the end of 2010 and nearly $2.3 trillion in the fourth quarter of 2011.
That's a lot of money. And it's understandable that the events of 2008 and 2009, when even creditworthy companies found they couldn't access loans, have led companies to overcompensate. Nobody wants to get caught short again.
But it really makes sense for cash-rich companies like Apple (and many others) to loosen their purse strings. We've been through a period in which corporations lowered their bottom lines through restructuring and productivity efforts and raised their top lines by tapping into strong, even rampant, global growth. But there are signs that both these trends might be tailing off. Productivity growth has slowed in recent quarters, and checked in at a .9 percent annual rate in the fourth quarter. And the rates of growth in important developing economies such as China, India and Brazil are cooling.
Add it up, and it means the forces that have driven growth and profits for large companies are waning a bit. To justify current valuations and attract investors, companies may find that they'll have to deliver cash via dividends and buybacks. Sure, Apple's dividend is a measly 1.8 percent. Given that the company's stock is up 80 percent in the past year, that's not a meaningful addition to total return. But in a climate where fundamentals can only power Apple to a 15 percent or (heaven forbid) 10 percent gain, then the significance of a dividend rises sharply.
Companies that amass huge amount of cash are essentially admitting that they don't have a lot of really good ideas about what to do with the money they're minting from their core businesses. They're not using cash to build new factories, or buy other companies, or invest in great new ideas. Many U.S. companies in a range of industries have more cash than they know what to do with. And so it sits in the bank, earning paltry interest. That doesn't do much to help the economy.
Now consider this: With about 936 million shares, Apple's $10.24 annual dividend would amount to about $9.6 billion cash per year. A good chunk of Apple's stock is held in retirement accounts, or pension funds, which means the dividends will either be locked up or plowed back into stocks. But those dividends will also find their ways into mutual funds and other investment vehicles that distribute (taxable) returns, and into the accounts of the hundreds of thousands of individuals who hold Apple's stock. And those people are far more likely than Apple to spend the money, or invest it in another stock or a business. Thus considered, dividends can be a source of stimulus. Extending the controversial Social Security payroll tax cut for 2012 will cost the government about $93 billion in lost revenue. In aggregate, Apple's $9.6 billion in dividend payments is equivalent to about 5.4 weeks of the payroll tax cut. What's more, assuming half of the dividends are paid into taxable accounts, they will generate about $720 million in federal taxes.
With stimulus waning, higher gas prices, long-term interest rates rising, and tax increases and budget cuts looming in 2013, the economy badly needs private U.S. companies to do more to stimulate the economy. They can do that by paying long-suffering workers a little more, investing in productive capacity in the U.S., or by returning unneeded, low-yielding cash to shareholders and letting them put the money to work.
Apple's long-awaited announcement is a good start. Of course, not every company can emulate Apple. But plenty of firms, large and small, can do much more on the dividend front. Attention should now shift to Google, which is sitting on $45 billion in cash.
Daniel Gross is economics editor at Yahoo! Finance.
Follow him on Twitter @grossdm; email him at firstname.lastname@example.org.
His next book, Better, Stronger Faster: The Myth of American Decline and the Rise of a New Economy will be published in May and is available for pre-order.