Apple’s new pitch to investors

By Felix Salmon
April 23, 2013
earnings report marks the point at which Apple is officially no longer a high-growth tech stock, valued on its monster potential.

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Today’s earnings report marks the point at which Apple is officially no longer a high-growth tech stock, valued on its monster potential. Instead, it has become a cash cow, valued on its ability to pump hundreds of billions of dollars into its shareholders’ pockets.

That’s the main lesson from the big news of the day, which is that Apple is going to return $100 billion to its shareholders by the end of 2015. By comparison, Apple closed Tuesday with a market capitalization of $380 billion. And its $145 billion cash pile isn’t going to get any smaller: the newly-announced program merely brings its dividend and share-repurchase expenditures up to roughly the level of its current free cash flow. Apple will still have more than enough money to invest as much money as it likes in anything it likes, even its new headquarters.

Apple says that its new capital-return scheme “translates to an average rate of $30 billion per year from the time of the first dividend payment in August 2012 through December 2015″; it’s pretty hard to imagine that number falling thereafter. If you assume fungibility of dividends and share repurchases, then you can express that number as an effective dividend yield: a $30 billion dividend, divided by a $400 billion market cap, works out to a yield of a whopping 7.5%. No wonder the stock market is welcoming the news.

In order to be able to continue to return $30 billion per year to shareholders in perpetuity, Apple is going to have to become a more conservative and predictable organization than it has been until now. Which brings me to the chart that Jay Yarow published yesterday:

sai-cotd-102213.jpg

As Yarow says, this chart shows the effects of Apple’s stated intention to be more realistic about its earnings guidance. And today’s earnings continued the pattern: EPS beat guidance by 7%, while revenues beat by 4%. Those numbers are decidedly modest compared to the kind of beats we saw in 2010-11.

But at the same time, we’re also seeing the law of large numbers in this data. Let me present Yarow’s revenue data in a slightly different way, adding in today’s latest datapoint:

guidance.jpg

It’s pretty clear that the massive beats, here, took place at times of massive growth: all corporate numbers are hard to predict, even internally, when they’re growing at 73% a year, like Apple’s revenues did in 2011. This quarter’s revenues are still substantially higher than the same quarter’s last year: they’re up 11%. But earnings per share are actually down by 18% from the same quarter last year, and when you’re a manufacturer making $10 billion a quarter on revenues of more than $40 billion, and when you’re as ruthlessly efficient as Apple is, you’re not likely to have a lot of big surprises any more.

Apple is trading at an astonishingly low valuation, with a p/e ratio in single digits, because it has now become that animal investors like least: a slow-growing tech stock. Either one is fine on its own, and both slow-growing stocks and fast-growing tech stocks can support much higher multiples than Apple is seeing right now. But conservative investors, who like slow-growing stocks with high dividends, are constitutionally uncomfortable with the volatility inherent in the tech world. And technology investors, who are happy taking that kind of risk, want to see substantial growth. Apple, notwithstanding the fact that it’s one of the most valuable companies in the world, is falling through the capital-markets cracks.

All of which perhaps explains the other part of today’s announcement: that Apple is going to start leveraging itself, and taking on debt. Apple’s debt will provide a safe low-yielding investment for conservative investors; and while it will increase the earnings volatility seen by shareholders, the fact is that Apple clearly hasn’t seen any valuation benefit from seeing its earnings volatility come down, so it might as well artificially bring it back up again. If its current capital structure is attractive to no one, maybe its new capital structure will have something for everyone.

6 comments

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I fail to see how when companies like Apple buy shares back, they are “returning cash to shareholders”. Those shareholders who decide to sell shares at that time don’t actually get to choose to sell the shares to Apple, and in any case, they can always sell the shares on the open market. If I’m not selling my shares, they’re not returning that cash to me. Cash dividends are the only way a company returns cash to shareholders; buying shares just reduces the number of shares in circulation, which doesn’t always yield gains for shareholders. And even if those repurchases result in share appreciation (but how do you know if that’s the cause?), it’s still not returning cash to shareholders, it’s only increasing the value of the stock, which is of no value until it’s sold.

It seems obvious Apple doesn’t want to bring profits home and pay taxes on them, which is why the tax code should be modified to exempt repatriated profits from taxes at the corporate level when they are distributed to shareholders. Instead of sitting in off-shore accounts doing nothing, that money would be distributed to shareholders, many of which are in the U.S., who would be forced to do something with the money, and also pay taxes on it. I’m guessing Apple will keep all those profits in some foreign bank account, which might be lent to another company that wants to borrow money to pay dividends because it doesn’t want to pay taxes on foreign profits.

Posted by KenG_CA | Report as abusive

@KenG_CA

AMEN AMEN AMEN!!! As a small investor with mostly tax sheltered money I would much rather see a dividend than a share-buyback. Dividends are the only return on an investment that can’t be lost if share prices drop.

The only exception to that would be when the share price is below book value which is most certainly not the case with AAPL.

You know who would rather see buybacks than dividends? The .00001% Tim Cooks expense account takes care of most of his expenses. He doesn’t need the dividend income of his $300,000,000. He could easily put a few million shares in a brokerage account and borrow against them at 2% interest. No dividend tax to pay, no gains tax to pay, easy money!

If Warren Buffet’s company paid a 3% dividend that would net him a cool billion dollars in annual dividend income which would be taxed at 23.8% federal… call it 200 million in taxes paid for round numbers. By not paying a dividend the money keeps growing within Berkshire and he pay’s nothing on that wealth creation. EVER! God bless the USA!!!

Posted by y2kurtus | Report as abusive

@KenG_CA

Clearly it’s a matter of point of view. No Apple haven’t returned cash to you, but you are not “investors” plural, nor does use of the term “investors” plural have to relate to any particular set or subset of your choice. I’m not sure it can be much simpler. A market is a place of buyers and sellers. Apple are buying back shares they previously sold to the market (not to you specifically) at a lower rate than the current share price. They are quite clearly returning cash to investors (which in fact they would be doing regardless of the current share price) !!!

Posted by TheBasicMind | Report as abusive

@KenG

Dividends may be a more tangible form of returning cold, hard, cash to shareholders, but buybacks are more efficient at transferring corporate profits (in the form of *capital*) back to investors. When they say they are transferring capital to investors in buybacks they are not referring to the investors they buy shares from (who do, in the open market, get cash) but to the *other* shareholders who in turn get to own a larger portion of the company when the bought-back shares are cancelled.

Yes, you are still subject to the whims of the market when you want to liquidate your equity, but buybacks are attractive to true long term investors since the company is essentially issuing additional equity to you just for being a shareholder, tax free. Unless you assume the market is never efficient, that equity will eventually be priced fairly.

Posted by gfodor | Report as abusive

@KenG_CA @ y2kurtus — you do realise that as well as the buy-back, Apple’s board also agreed to increase the quarterly dividend by 15%, right? So they _are_ directly returning more cash to the shareholders.

Posted by ManxStef | Report as abusive

Two questions:

1) When Apple posts another few quarters with 50%+ growth in the next few years, what will happen to its share price?

2) What makes Apple’s dollar of revenue, with ~40% gross margin worth about as much as Amazon’s, with single digit margins (if that)?

Posted by MaysonLancaster | Report as abusive