Investors eagerly awaited Apple CEO Tim Cook's announcement about how Apple would spend its gigantic cash stockpile. When Cook announced that he planned a stock buyback and a dividend, it confirmed that Apple remained on the right track. Apple had another possible choice to make -- spending the money to acquire other companies -- and I think Cook's decision not to spend the cash on buyouts right now was the correct one.
Apple's decision to hold a large cash stockpile was reasonable, and its competitor Microsoft is also well known for its large cash stockpile. Another software company could make Microsoft's office software and operating system dominance obsolete by capitalizing on the opportunities that the Web offers, so Microsoft needs a large enough cash reserve to keep the company running if it has to develop a new product line. Although Apple's March iPad launch shows that other tablet manufacturers currently pose little threat to the company, it needs to maintain some cash reserves in case another tablet or smartphone manufacturer has an unexpected success.
Apple doesn't need to make any acquisitions at the moment. An acquisition should offer a significant business advantage to the buyer, such as a new product line or lower materials costs. Spending $775 million to buy Kiva was the correct decision for Amazon, as the robots can help the online retailer reduce its warehouse bills, and Amazon was not known for manufacturing warehouse robots. Apple could potentially purchase a chip maker to reduce its materials costs, but it buys so many chips that it already has a great deal of leverage over many of its chip suppliers.
Apple's decision to avoid an acquisition also suggests that Tim Cook has not altered Apple's long-term marketing strategy. Apple succeeded in the tablet and smartphone markets by designing stylish products, which helped the company capture market share from established manufacturers. Apple maintained its design philosophy by using its cash reserves to design a better product, instead of purchasing another company and redesigning its products to fit Apple.
The decision to offer a dividend seemed somewhat inevitable. Apple's size may limit its growth potential somewhat, even though it reported extremely high growth in its last quarter. A dividend declaration offers another way to boost Apple's stock price and satisfy its investors, and the stock buyback should also make Apple investors happy.
Apple's plan to spend $45 billion over the next three years may not even reduce its cash reserves if its strong sales continue. Apple can easily afford to return $15 billion a year to its shareholders if it earns $33 billion a year in net income. Apple's press release does mention the possibility that Apple may cut its payout in future years if its sales weaken, although the iPad 3 sales figures show that Apple's customers currently remain loyal. Tim Cook's decision should help Apple maintain its performance in the future.