MarketView for March 19

Summary 

The S&P 500 index extended its rally on Monday to climb within 10 percent of its historic closing high. One key reason for the advance was Apple’s announcement indicating that the company planned to pay a $10 billion annual dividend and implement a stock buyback program. As a result, the index is now at its highest point since May 2008 and 10 percent below the record close of 1,565.15 set on October 2007.

Given that retail investors are often mesmerized by such gains, it is more than possible that there will be a follow-on flow of retail investor money that  in turn could fuel the next leg of the rally that has driven the S&P 500 up 12 percent so far this year.

Apple, the world's most valuable publicly traded company, rose 2.7 percent to $601.10 - marking the first time the stock has ended above $600 - and inching closer to a 50 percent gain this quarter. Apple, which manufacturers the iPad and the iPhone, said it will pay a dividend of $2.65 a share quarterly, starting in July, and also announced it will buy back $10 billion in stock, starting in the next fiscal year.

The announcement from Apple comes less than a week after major domestic banks responded to the results of the Federal Reserve's stress tests by announcing bigger dividends and billions of dollars in stock buybacks.

These increases, alongside a steady stream of upbeat economic data, have cleared the way for more investment in stocks. Financials were the second-best performing among the top 10 S&P 500 sectors, ranking only behind the tech sector.

UBS raised its price target for US Steel's shares by almost 24 percent, attracting a blitz of investor attention, and the metal maker's shares jumped 6.4 percent to $31.64.

United Parcel Service rose 2.8 percent to $81.11 as it clinched a deal to buy Dutch peer TNT Express, making UPS the market leader in Europe.

Broadcom gained 2.6 percent to $38.78 after the chipmaker said it won a preliminary injunction against Emulex in a patent infringement lawsuit.

On the economic front, domestic homebuilder sentiment was unchanged in March, holding at its highest level since June 2007, while sentiment in February was revised lower.

About 6.5 billion shares changed hands on the New York Stock Exchange, the Nasdaq and Amex, slightly below the daily average so far this year of 6.9 billion shares.

Apple to Pay Long Awaited Dividend

Apple CEO Tim Cook fulfilled a longstanding desire of Wall Street by initiating a quarterly dividend and share buyback that will pay out $45 billion over three years. The world's most valuable company will start paying its first dividends since 1995 - a regular quarterly payout of $2.65 a share - in July, and buy back up to $10 billion of its stock beginning in the next fiscal year. The $10 billion annual dividend program, which Cook said will be reviewed periodically, ranks among the largest current corporate cash payouts.

Yet the announcement disappointed some fund managers, given that Apple will be offering up a 1.8 percent dividend yield that lags the average payout of companies making up the S&P 500 index and is modest in size when compared to Apple’s $98 billion war chest. And the money continues to flow in. On Monday, the company said it had sold 3 million of its latest, 4G-enabled iPads, setting a first-weekend record for the line of tablet computers.

Cook told analysts on Monday that "making great products" remained top priority, echoing the sentiments of his former boss, who died last October after a long battle with cancer.

Cook has impressed Wall Street since taking the helm. He made his mark revealing Apple's production partners and initiating investigations into allegations of labor abuse in its supply chain, and addressing investors directly at this year's Goldman Sachs conference. But the question of whether the operations maven can envision revolutionary products lingers for some.

Cook's move came less than a year after he was appointed head of the company and suggested to many a move away from Jobs' era, when a dividend was often mentioned but not acted upon. Under Jobs, Apple maintained that capital preservation was key and the company needed the flexibility of having a cash pile.

When Cook was announced as CEO of Apple, Wall Street feared he lacked Jobs' uncanny vision for ground-breaking consumer electronics. But Apple's shares have gained more than 50 percent since Jobs' death and set a record above $600 last week as the assurance with which Cook has taken the reins becomes increasingly evident.

Within company headquarters at 1 Infinite Loop, there remains a sense of urgency despite the success. Cook, a former IBM executive and Apple long-time chief operating officer, oversaw the rollout of the iPhone 4S last year and presided over what he said on Monday was a "record weekend" of sales for the new, 4G-enabled iPad. "Innovation is the most important objective at Apple and we will not lose sight of that," Cook said during the rare late-quarter conference call.

Many investors now await an Apple TV or a similar device: a gadget that will transform an industry the way the iPhone did. On a conference call, one of the first questions that cropped up regarded the product pipeline. Cook declined comment. One of the risks is that Apple has little in the way of recurring revenues. Most of the revenue is new sales, which means that innovation is critical.

Apple joins the ranks of Silicon Valley blue chips that have recently begun doling out dividends, including Cisco, which announced its first-ever cash payout in March 2011. Among major technology companies, Apple rival Google remains a prominent holdout.

It is likely that the initiation of a regular payout will attract a broader investor base. Nonetheless,  many mutual funds have already added the stock to their portfolios on the idea that a dividend would be forthcoming given Apple’s enormous cash balance., In addition, Cook said this year there were active discussions at the top level about what to do with its $98 billion hoard of cash and securities.

Apple expects the share buyback program to run over three years, with the primary objective to offset the impact of employee stock options and equity grants. Its annual dividend yield will come in around 1.8 percent. That ranks above Oracle Corp and IBM but falls just short of the average of around 2.4 percent for companies in the Standard & Poor's 500 index.

The company will still maintain a "war chest" for other strategic opportunities, Cook said. "These decisions will not close any doors for us." The creator of the iPhone, iPad and iPod has $98 billion in cash and securities, equal to about $104 a share. Apple said it anticipated using about $45 billion of domestic cash in the first three years of its buyback and dividend programs.

Asked about the substantial cash Apple has parked overseas, Chief Financial Official Peter Oppenheimer said the company had no plans to repatriate it at this time.

"The current tax laws provide a considerable economic disincentive to companies that might otherwise repatriate the substantial amount of foreign cash that they have," he said. "That's our view. And we've expressed it."