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Apple pays up, but keeps billions offshore

Customers look at the the new iPad at the Apple Store at the Toronto Eaton Centre shopping mall in Toronto March 16, 2012. The new iPad went on sale on Friday in 10 countries, including the United States, Canada, Singapore, France and Britain.

MARK BLINCH/Mark Blinch/Reuters

Apple Inc. 's dividend and stock repurchase plan is big, but U.S. tax law potentially kept it from being even bigger.

For the first time in almost 20 years, the consumer technology powerhouse is paying out a dividend to shareholders, many of whom have complained for years that Apple's almost $100-billion (U.S.) in cash isn't being put to good use.

Apple said Monday it will pay shareholders a quarterly dividend of $2.65 a share starting in July, a decision that will cost about $10-billion a year. The company also said it will buy back $10-billion of stock over three years, in part to offset the issuing of stock to Apple employees.

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But instead of leveraging its entire wallet, Apple will use only the cash it has in the United States, which accounts for just about half its total. That's in large part because bringing the overseas money home would entail a big tax hit – one that Apple isn't willing to take.

"We think that the current tax laws provide a considerable economic disincentive to U.S. companies that might otherwise repatriate the substantial amount of foreign cash they have," Apple chief financial officer Peter Oppenheimer said on a conference call. "That's our view and we've expressed it."

Mr. Oppenheimer's comments are likely to fuel further debate over what is already a hot political issue. The United States currently seeks a cut of the profits its companies earn abroad.

But some law makers – with the support of the business lobby – argue the policy is causing companies to keep money overseas that would otherwise be used to spur investment and create jobs at home.

The U.S. Internal Revenue Service doesn't seek to double-tax foreign profits; it expects only the difference between the U.S. federal rate of 35 per cent and the rate paid abroad. However, the IRS allows U.S.-based companies to defer paying taxes on overseas profits until that income is repatriated.

Because economic growth has been so much stronger in Asia and Latin America over the past few years, the international affiliates of U.S. companies have been generating the bulk of the income.

As a result, Apple chief executive officer Tim Cook said the company will use only the money it already has in the U.S. to fund its new program. Analysts had expected some sort of dividend from the company for some time, as investors complained the free cash was being underutilized. The late Steve Jobs had been vehemently opposed to such a move, but Mr. Cook was less reluctant.

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Barring a serious near-term downturn in sales, the move carries little risk for Apple. It immediately opens the company's shares to funds and investors focused on dividend-paying stocks, but doesn't put a serious dent in Apple's overall cash pile, because the company continues to generate so much money from its sales. Mr. Cook told analysts that the move will not seriously affect Apple's product pipeline or its ability to make acquisitions.

"I think the growth speaks for itself," he said. "The pipeline is full of stuff."

Although dividends aren't usually associated with fast-growing companies – a category Apple has firmly resided in, thanks to the launch of the iPod, iPhone and iPad – most analysts seemed pleased with the move.

"Apple's $2.65/share quarterly dividend … to us communicates a confident future," said RBC analyst Mike Abramsky, who raised his price target for Apple shares to $675 from $600 following Monday's announcement. "We also believe Apple has room to raise its dividend over time."

Investors didn't seem as pleased, however. Despite the news, Apple shares rose only about 2.65 per cent on Monday – perhaps a signal that investors had already priced such a move into the stock, or were hoping for a bigger payout. Still, the stock closed above $600 for the first time in its history.

The really good news for Apple on Monday may have come after the dividend announcement. Later in the day, the company announced it has sold more than three million units of its latest-generation iPad since Friday, making it the biggest iPad launch so far.

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