How An Apple (AAPL) Dividend Would Impact ETFs

by on February 28, 2012 | ETFs Mentioned:

Few stocks receive more attention from the financial presses than Apple (AAPL), the tech giant that has made a remarkable recovery from life support in the early 1990s to become one of the largest companies in the world. The stock has long been an investor favorite based on consumers’ insatiable appetite for almost every new product that the company throws their way. But from an investing standpoint, the first two months of the year have been nothing short of stellar, as the stock has shot up over 28%, or more than $100 per share. But perhaps the biggest buzz about the tech giant has not been about its performance, but the rumors of a special, one-time, distribution to its investors [see also 12 High-Yielding Commodities For 2012].

The Cash Stash

The speculation of this rare dividend comes from Apple’s alarmingly massive pile of cash, which sits just shy of $100 billion. Under the reign of Steve Jobs, Apple was always very careful with cash, a move that many speculate came from a brush with insolvency early on in the company’s history. That mentality has only been furthered by current CEO Tim Cook, who stated that “we are judicious, we are deliberate. We spend our money like it is our last penny. I think shareholders want us to do that. They don’t want us to act like we are rich. That may sound bizarre but that is the truth.” But with a cash stockpile that recently exceeded the holdings of the U.S. government, Cook has perhaps recognized that the company has more than it needs and is calculating its next move [see High Tech ETFdb Portfolio].

Though no dividend was announced at its shareholder meeting last week, the speculation still remains that the company will invariably be forced to make some kind of distribution. But this move would shake up not only the tech industry, but a number of exchange traded funds that hold AAPL as a significant portion of their assets. Recently, Apple became the world’s largest company by market capitalization, surpassing Exxon Mobil. But a major portion of the current market cap of about $488 billion comes from the mounting cash pile. A payout of  $50 per share, a figure that some analysts say would be reasonable, would still leave the company with around $30 billion in cash. But that move would effectively transfer tens of billions in market value from AAPL stock to cold, hard cash–potentially allowing Exxon’s $414 billion market cap to take back the number one spot [see also Crude Oil Guide: Brent Vs. WTI, What’s The Difference?].

The Exchange Traded Effect

If Apple does indeed make a significant distribution in coming months, it should be noted that the distribution could materially alter the composition of several exchange-traded funds. As AAPL’s market cap declines, so too does its allocation in cap-weighted indexes–regardless of whether that decline is driven by a change in investor sentiment towards the company or a special distribution of cash. Apple would be worth less if it were to suddenly shed tens of billions in market cap, so it makes sense that would be reflected in index weightings. In other words, a special dividend could result in ETF investors owning significantly less AAPL in their portfolios than they do now, effectively transferring that value to cash and the weightings within ETFs to other securities [see also AAPL Weighting In QQQ Slashed].

Another important issue to address is what happens to ETF investors if AAPL does in fact make a payout. While nothing can be said with certainty at this point, there are two options that fund issuers can take. They can either pass the dividend on to their investors (the most likely scenario) or they could hold onto the cash and make a reinvestment. Below, we profile a few ETFs with huge weightings in Apple–for the time being at least:

  •  PowerShares QQQ (QQQ): One of the most popular ETFs in the world, QQQ weights Apple as its top holding with about 15% of total holdings. The fund has over $33 billion in assets with a massive daily volume of over 50 million. QQQ pays a meager dividend of under 1%, but the proposed special dividend could boost that yield for a singular quarter.
  • Technology Select Sector SPDR (XLK): This fund tracks the U.S. technology sector and does so with nearly $9 billion in total assets. A 16% allocation makes Apple the largest holding of the ETF as it nearly doubles the weight of the next highest security. XLK’s annual dividend of 1.3% is sure to see a healthy jump if the special dividend goes through.
  • Dow Jones U.S. Technology Index Fund (IYW): IYW tracks an index with a similar methodology to XLK, but this fund is a bit smaller, with $1.5 billion in assets under management. Of the three funds on this list, IYW holds Apple in the highest regard, with a number one slot and a weighting of just over 18%. Similar to QQQ, IYW’s dividend is barely noticeable, but could make a mark with an Apple payout.

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Disclosure: Photo courtesy of Joe Ravi. No positions at time of writing.