Fighting Apple Is Like Fighting The Fed
Over the last couple of years, this has not been a great overall market for short sellers. While there are definitely chances to short certain individual names, the overall market has gone higher and higher. Part of the reason for this rally is the Federal Reserve’s Quantitative Easing program, otherwise known as QE. In the most recent year or two, the phrase most widely used is “don’t fight the Fed.” As the Fed continues to pour billions into the market, we keep seeing new highs.
So when it comes to Apple (AAPL), I often laugh at those who ignore Apple’s capital return plan. In early 2012, Apple launched this plan, which it has since expanded. In just over three years, Apple is expected to return $100 billion to shareholders. That’s right, $100 billion. This point is often lost on the bears, who will criticize the buyback for not being big enough, then flip and criticize Apple for the buyback boosting earnings per share. Apple just finished its fiscal Q4 2013 period, which is the third calendar quarter. That means that there are nine quarters left for the $100 billion plan, and Apple has only spent about $37 billion so far. That means $7 billion of capital returns on average for the next nine quarters! Today, I’ll look at Apple’s dividend and buyback again, and examine why when it comes to Apple, fighting Apple is like fighting the Fed.
First, the dividend:
Apple restarted its dividend in 2012 with a payment of $2.65 per quarter. They upped that figure to $3.05 a quarter this year. While that rise wasn’t as large as some hoped, Apple announced a huge increase to its buyback, from $10 billion to $60 billion, which I’ll get to in the next section.
At the end of fiscal Q4, Apple’s most recent quarter that ends in late September, Apple had paid out just over $13 billion in dividends since the restart, according to the 10-K filing. Between the dividends and taxes related to the settlement of equity awards, Apple should total about $40 billion by the end of 2015, since the buyback is $60 billion. The amount of the next two dividend raises will depend on how quickly shares are bought back. With a much lower share count now, Apple is paying out less in total dividends at the same dividend rate ($3.05). Currently, I would expect dividend increases of approximately 10% per year for the next two. Obviously, if Apple buys back shares quicker, it will have less shares to pay dividends on, which will save them more up front. That could lead to larger increases. Of course, with Apple shares now trading above $500, less shares can be bought back. Those invested in Apple are happy with the stock’s rise over the past few months, but those looking to enter now are slightly hurt by the rise.
For the moment, Apple doesn’t need a tremendously large dividend. A 2.35% yield as of Monday’s close is nothing to ignore however. Right now, it makes sense for Apple to get the share count down, and that means spending more on the buyback. Once the current buyback ends in 2015, I expect a new program to start, but the rate of that buyback to slow down. At that point, Apple’s dividend will really start to pick up in my opinion. Let them get the share count down now, so that the dividend can really be raised in a couple of years.
The buyback is just getting started:
Apple bought back almost $23 billion in stock during fiscal 2013. $9 billion of that was through open market purchases, and another roughly $14 billion was part of an accelerated repurchase. In the fourth fiscal quarter of the year, nearly $5 billion was spent to buy back shares at an average price of about $479. The chart below shows how Apple’s outstanding share count dropped thanks to the buyback, now at levels not seen since fiscal 2009.
So with just one year of the buyback, really three quarters (since no shares were repurchased in Q2), the outstanding share count plunged. Three years of share count increases, plus the increase that would have occurred with no buyback, were wiped out.
This is only the first stage in the process. There was still about $37 billion remaining on the buyback plan at the end of fiscal Q4. That represents an average of $4 billion per quarter for the next nine quarters. At Monday’s closing price, that represents about 71 million more shares. Now, some of that will be offset by executive options, but I think we can figure that the share count will come down by another 50 million or so over the next two plus years, based on current stock prices.
Now remember, my thoughts above only take into consideration the current buyback plan. It does not include an expanded buyback or a new program that would start in late 2015 or early 2016. Carl Icahn is arguing for a larger buyback, and I think a larger buyback will eventually come. The key question is timing. Apple could take the buyback from $60 billion to $100 billion, $200 billion, whatever it may be, at any point. The question is will they time it so that they buy back more before the end of 2015. If they take the buyback to $100 billion, but that $40 billion is after 2015, then it is really just a new buyback plan. A truly increased buyback means more than $60 billion will have been repurchased by the end of 2015. Apple management has stated that any updates to the capital return plan will be announced in early 2014.
No buyback can compare:
Apple bears will argue that Apple is playing catch-up with its buyback. These people will tell you about the tens of billions that other names have spent over the years. It is true that many of these names have bought back tons of stock in the past. But are you investing in the past, or investing for the future?
Microsoft (MSFT) recently announced a new $40 billion buyback as its current plan was coming to an end. Microsoft bought back $1.5 billion in its latest quarter, which is a lot less than Apple did. Of course, Microsoft has been buying back stock for years, and Microsoft has a smaller market cap. However, Microsoft does not generate as much cash as Apple, and Microsoft’s outstanding share count only dropped by about 1% over the past year. Microsoft’s cash position (domestic cash) isn’t large enough to support a tremendous buyback. Thus, Microsoft’s buyback won’t be that powerful in the next couple of years.
Intel (INTC) and Cisco Systems (CSCO) are two other tech heavyweights that also have decent buybacks. However, both of these companies going forward will be more reliant on dividends than buybacks as part of their capital return plans. Cisco will be reporting this week, so we’ll see then how its buyback is coming along. Intel’s buyback is slowing down as the company continues to battle declining revenues and plunging earnings.
This is still a growth company:
As someone who covers Apple a lot, I’ve heard a lot of arguments both for and against Apple. If you listen to the Apple bear camp, you might think that Apple is not a growth company anymore. Well, Apple may not be growing as fast as it used to be, but it still is one of the fastest growing large cap tech names. As you can see from the chart below, only Google (GOOG) is growing faster, and Google trades at a much higher (and more ridiculous) valuation.
*Non-GAAP values for EPS growth and P/E.
Apple is still growing revenues in the high single digits. That’s not too shabby for a company with a revenue base of more than $170 billion and a market cap of nearly half a trillion. For a large cap tech company, Apple is still growing at a solid pace. But if you listen to the bear camp, you’d think Apple’s revenues were declining faster than Intel’s are. Also, once you convert Cisco’s earnings to GAAP, Apple becomes the cheapest name on this list. Even though Apple has the lowest dividend yield (excluding Google), Apple offers the most growth right now and the best buyback. That’s a winning combination.
Over the next two years, give or take a few months, Apple will be returning another $60 billion to shareholders. You won’t find a more shareholder friendly company in that respect, and that assumes the buyback is not expanded. Apple has a solid dividend and the biggest buyback out there. Oh, the company also has more growth than many give it credit for. Many in today’s market say you shouldn’t be fighting the Fed. I would argue that you shouldn’t be fighting Apple either