Apple Inc. (Nasdaq: AAPL) will pay a $2.65 quarterly dividend and buy back $10 billion in shares, the company said Monday.

The quarterly dividend will starting in its fiscal fourth quarter, which begins July 1, and run for three years.

The dividend works out to $10.60 annually, or a 1.8 percent yield at the current stock price. That’s below the yield of other big technology companies like Microsoft Corp., currently at 2.5 percent, and Hewlett-Packard Co., at 2 percent.

A $10 billion share buyback program will begin next fiscal year, which starts Sept. 30, and run for three years.

Apple is sitting on $97.6 billion in cash and securities. For years, it has resisted calls to reward shareholders with some of that money. Since the death of CEO Steve Jobs, management has signaled that it’s been considering options for the money.

The dividend will cost Apple about $10 billion annually. That’s less than the cash the company generates, so its cash levels will continue to grow, but at a slower rate.

Investors had been expecting Monday’s announcement, driving up Apple shares 37 percent since management hinted in January that a dividend was in the works.

New CEO Tim Cook said that with this much cash on hand, a dividend wouldn’t restrain the company’s options. Cook said the company also considered splitting its stock, and continues to look at that option. Stock splits increase the number of shares while reducing their value, potentially making it easier for small investors to buy them. But Cook said “there’s very little support” for the idea that this helps the stock overall.

“These decisions will not close any doors for us,” he told analysts and reporters on a conference call.

Apple generated $31 billion in cash in the fiscal year that ended in September, and is on pace to generate even more in the current year. That means its cash pile will continue to grow even with a dividend and a buyback program, albeit at a lower rate.

Had it kept amassing cash and low-yielding securities, Apple could eventually have opened itself to legal challenge from shareholders, who could have argued that it was misusing their money.

In absolute terms, Apple will pay one of the richest dividends in the U.S. It will spend more than $10 billion on dividends in its first year, placing it just below companies including AT&T Inc. and Verizon Communications Inc., for whom the dividend is the main way of attracting investors.

Exxon Mobil Corp., the world’s second largest company by market cap, pays about $9 billion in dividends annually.

The dividend opens up ownership of Apple shares to a wider range of funds, potentially boosting the stock price in the long term. Many “value-oriented” funds are not allowed to buy stocks that don’t pay dividends.

Buybacks are a popular alternative to dividends, since they reduce the number of shares outstanding. That means every remaining investor has title to a larger share of the company.
Cook said the main point of Apple’s buyback is to offset the shares issued to reward the Cupertino, Calif., company’s employees.

In morning trading, Apple shares rose $7.75, or 1.3 percent, to $593.32. Last week, the shares hit an all-time record of $600.01. The company is worth $555 billion.

The dividend and buyback announcement comes three days after the launch of Apple’s latest iPad tablet in the U.S. and nine other countries.

Cook and Chief Financial Officer Peter Oppenheimer heralded the news in a press statement before the conference call.

“We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure. You’ll see more of all of these in the future,” Cook said in a statement. “Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program.”

Added Oppenheimer: “Combining dividends, share repurchases, and cash used to net-share-settle vesting RSUs, we anticipate utilizing approximately $45 billion of domestic cash in the first three years of our programs. We are extremely confident in our future and see tremendous opportunities ahead.”

Apple shares have risen 37 percent since Oppenheimer said on Jan. 24 that Apple’s board was in “active” discussions about the use of cash. In pre-market trading, the shares rose $4.96, or 1 percent, from Friday’s close to $590.53. Just before the announcement, the shares were above $600.

The dividend opens up ownership of Apple shares to a wider range of funds. Many “value-oriented” funds are not allowed to buy stocks that don’t pay dividends.

Analysts had expected Apple to institute a dividend.

“They should pay a dividend,” Shaw Wu, an analyst at Sterne Agee & Leach Inc., told Bloomberg news. “This is something that large shareholders have been asking for.”

A dividend would reward shareholders and open ownership of Apple shares to a wider range of funds. Many “value-oriented” funds are not allowed to buy stocks that don’t pay dividends.

Analysts say the lack of a dividend or other meaningful way of using the cash has held down Apple’s share price.

Apple may issue a quarterly dividend of $2 a share, according to data compiled by Bloomberg.

The estimate is based in part on the dividends paid by other large technology makers, including Microsoft Corp. and International Business Machines Corp. Brian Marshall, an analyst at ISI Group, projects an annual dividend of $14.65 a share.

Cook said that when Apple analyzing how much it could give out to shareholders, it looked solely at how much cash it has in the U.S. Like many other big exporters, Apple has much of its cash overseas – two-thirds, specifically.

Apple is reluctant to bring back overseas profits, which have already been taxed in their respective countries, to the U.S. because they’d then be subject to the 35 percent corporate tax rate.
“Current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate a substantial amount of foreign cash,” Chief Financial Officer Peter Oppenheimer said.

Cook said the company looked at how much domestic cash it had, then set aside enough for planned and unplanned investments. What was left over would be given out to shareholders, he said.

That suggests that if Apple could bring back its $64 billion in overseas money, the rewards to shareholders could be larger. Corporations have been clamoring for a change in tax laws, or a repeat of a 2004 tax amnesty on repatriated earnings.

(Bloomberg news contributed to this report.)

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