Apple to Buy Back $10bn of Its Shares and Pay Dividend

floydman writes "Apple has said it will use its cash to start paying a dividend to shareholders and to buy back some of its shares. The technology giant said it would pay a quarterly dividend of $2.65 per share from July. It will buy back up to $10bn of its own shares starting in the company's next financial year, which begins on 30 September 2012. Apple CEO Tim Cook said, 'We have used some of our cash to make great investments in our business through increased research and development, acquisitions, new retail store openings, strategic prepayments and capital expenditures in our supply chain, and building out our infrastructure. You'll see more of all of these in the future. Even with these investments, we can maintain a war chest for strategic opportunities and have plenty of cash to run our business. So we are going to initiate a dividend and share repurchase program.'"

Comments

Context?

[TaoPhoenix]

Any finance experts here? What does this buyback do? It probably makes the remaining shares more valuable, but are there any nasty angles to this?

Re:Context?

[Anonymous Coward]

More importantly, if it reached over 50% ownership of its own shares would it become sentient?

Re:Context?

[LordKaT]

There are some medium-long term downsides to this, should Apple fall hard in the long term (ie; tablets prove to just be a trend, iPhone sales fall, etc...), but this is what investors have been waiting for. This is a fairly large buyback, which will inflate the price of the shares even more, but it's a small amount of money for Apple to be investing in itself.

This will more than likely force AAPL above $600 for the remainder of the financial year (and probably closer to $700).

Re:Context?

[stevel]

Stock buybacks indeed make the shares more valuable. Paying dividends can entice some institutional investors to buy shares which they would not otherwise do. As long as Apple keeps sufficient cash on hand, this is a general win.

Re:Context?

[Billly Gates]

It means Apple (according to many guru's and those on Wall Street in this day and age) think they do not know how to invest in themselves and what is valuable. Instead they feel to give the money back to the shareholders as they can invest in the money better than they can. Apple's stock price went down after the bell opened, but did go up in pre-trading (why is that legal ?)

However, my opinions are more old fashioned and feel Apple should give money back to its owners after they invested the risk duh. Doing so in old school theoretical sense means they want less pressure on quarterly results and on just raising the share price and giving investors some of their earnings back eleviates this and allows for the same amount of money for slower growth from investors. Which is what the the thinking was even if that is rejected for newer investors as growth not revenue is everything.

If I made you a partner in a company but didn't pay you because Hairyfeet, might just pay you then you will be on my ass to rise the share price as you see no return anyway. If it goes up then you gain money. That is how Apple has been operating since 1997.

Apple is trying to eleviate that.

It also is a little disapointing as Apple could start a 4G network to compete with the big boys, use the money for more R&D, or pay their Foxconn employers more and educate them to work for Apple China through scholarships. But Apple did not want to take that risk.

Re:Context?

[tverbeek]

"To some extent opt 1 means they can't think of anything productive to do with the money, so they're giving it back. Frankly this might be true."

Or (getting in touch with reality briefly) it means that they can't think of anything that they need 100 billion dollars for, but they think that merely tens of billions of dollars, plus the ongoing profits from their money-printing iProducts, will be enough working capital for what they do have planned.

Re:Context?

[Anonymous Coward]

I have two Finance degrees and close to a Master's.

1) In theory the stock buyback would do nothing to the value of shares. The remaining shares would own a bigger part of the company, but this company is ten billion dollars less valuable. In an efficient market, this would offset

Fact: We do not operate in an efficient market.

2) Investors will look at this as a signal that the company is bullish on its future, and you will see a disproportionate rise in the stock.

Essentially, Apple is saying "our shares are undervalued". They have more information than the general public (hence the inefficient market comment). Apple says it is willing to buy at this low price, so th market says "time to buy".

Re:Context?

[Anonymous Coward]

Your TLDR version is wrong.

Corporate investments are (in theory) all about how to get the best return. Cash is a powerful asset, and can be used for all sorts of stuff. A company paying dividends/doing buybacks is signalling the market that they don't have an option that produces a return for shareholders that beats the market, for that particular piece of money.

Holding cash causes a loss in value due to the inflation. AAPL is saying that they don't have a market-beating option for that chunk of money. Thus, they give it back to the shareholders (so they can get a better return). Likewise, the buyback will push up stock value (a return for shareholders), at least in the short-term, and consolidates control. Which the company believes is a better use of the money right now.

Note that (I'm 99% sure) this is a special dividend - they aren't committed to it for ever and ever (like some companies). They still invest like crazy in R&D, and have said they will continue to do so. They just don't have $100B worth of R&D opportunities that will generate a market-beating ROI, in their opinion.

This doesn't say anything about pessimism or avoiding problems - it's an ROI thing. A regular dividend from a tech company would be a discouraging sign, esp. one with as much growth lately as AAPL, in the markets they play in. I think this just says they made a shitpile of money, and couldn't spend it fast enough on worthwhile stuff. That's all.

Re:Context?

[phantomfive]

My best estimate is that Apple shares should be priced around $130-$150/share, not the idiotic $600 that people have bid it up to. If I had the cash to short Apple stock over the long term, I would do that.

lol now we know why you don't have the cash. At the rate Apple is making money, if their stock were $130 a share, they could buy back all of it by the end of the year.

Also stop looking at the absolute number of stock price, because it's unimportant. You need to consider the total value of the company VS total profits. At a P/E ratio of 15, Apple IS cheap, unless you think they are not going to be able to keep making money like they are now (a case could be argued to that point, but you haven't done that).

Re:Context?

[rsborg]

Shortly after the iPad 2 was released, it was an "okay" update on the first one, but relatively lacklustre. It was hard to think much of that at the time, but it and the increase in legal attacks started to really set the stage for what was going on at Apple.

The June/July period came and went, with no iPhone release, it didn't seem too big a deal but when the iPhone4S eventually came, it came late and was a major dissapointment

Do you work for the Enderle Corp or some "technology analyst" firm that feels they can ignore market reality? Those products you state as "disappointments" were the best-selling and most profitable products of their respective markets. Just because you can't see past the horizon doesn't mean the earth is flat.

Re:Context?

[Anthony Mouse]

Essentially, Apple is saying "our shares are undervalued". They have more information than the general public (hence the inefficient market comment). Apple says it is willing to buy at this low price, so th market says "time to buy".

I think it's important to point out something else here: They just have a huge pile of cash and nothing to do with it.

What they could do is issue it all as dividends, but that actually makes the share price go down. Because you start with a company that has ~$140B in cash, and you end up with a company that has the same non-cash assets but now has $120B in cash. Obviously the latter company is not worth as much money, because it doesn't have as much cash. The shareholders start with a share in a company worth $550, the company issues the dividend and the shareholders end up with a share worth $530 and $20 in cash. The cash has to come from somewhere and it comes out of the share price.

Allowing the share price to go down like will cause a lot of people to be unhappy. It's especially bad for employees who have stock options.

Doing the buyback instead has a lot of advantages, primarily as a result of leaving the share price where it is while still giving investors who want cash a way to get it without diluting their ownership stake in the company. If the company buys back 5% of its outstanding shares and you tender 5% of your holdings, you end up with cash in your pocket but no smaller percentage ownership of the company, and the employees and others who don't want the share price to go down are happy to see that it hasn't.

Re:Context?

[L3370]

This should not be modded insightful, and the person should be glad that they posted as AC.

$130 per share would barely cover the amount of PURE CASH the company holds, let alone there assets in real estate, patents, office furniture/equipment etc.... Factor in other details such as...oh I dunno... actual profits... projected earnings and other profit making assets, one could argue that this is one of the few companies IN THE WORLD that deserve such a high valuation. How many multibillion dollar companies can you name that have the same profit margins as Apple? That's a tough list to compile. How many companies beat analyst estimates nearly every single quarter and post record profits on a regular basis?

Your opinion on share buyback is sound, however. It's popular right now to believe share buybacks are a waste of money. Investors don't seem to be moved very much by this gesture now days. You can rightfully argue the buyback plan is a waste, but on paper less stock available should equal more value per share.

Re:Context?

[dgatwood]

You're pulling your punches. Apple has a little over a hundred bucks per share in cash position, and made about $20 per share in Q4 2011. So the GP is suggesting that Apple's value should be based on their current cash position plus one quarter worth of sales, which means after you take out the cash, the company would have an effective P/E ratio of 0.25.... That's so far removed from proper investing advice that it's absurd. Such a low P/E ratio would make sense only for a company on the verge of bankruptcy.

Re:Context?

[Joe Decker]

By itself it is (here) a small concentration of power, roughly speaking offset in Apple's plan by the deconcentration of power that happens when they issue new shares of stock for stock option grants and so on. No big deal.

Another way of thinking about it is that there's a lot of money sitting around that isn't actually doing much for it's share owners. It's making maybe a couple percent in government bonds. By returning some of the "wealth of the company" to owners, it allows those owners to decide how they want that additional money invested. If Apple could make a new product that cost $50B to make and returned a good profit on that, it'd be much better for investors if they didn't issue a buyback. But it doesn't do anyone much good for a cash pile that big to just sit around in low-yielding bonds, unless it can eventually be put to work.

Re:Context?

[s122604]

In theory the stock buyback would do nothing to the value of shares. The remaining shares would own a bigger part of the company, but this company is ten billion dollars less valuable.

yah, um, well sorta...
You are distributing some of your cash pile, but it's cash you aren't using. Buying back shares, means you are reducing the float, which means earnings per share goes up, which makes the P/E multiple go down (and Apple's PE multiple is fairly modest to start)..
These are all good things.
The dividend isn't much, but it does help to draw in dividend-ased mutual fund managers who, by their fund's charter, have to invest in stocks that pay dividend. Also IRA, and Roth based investors will often automatically reinvest the dividend, essentially doing a "buyback" for you..

One other thing to note is that, the plan anounced today is still modest. Even if apple only manages to grow 1/3rd the rate analysts predic, their cash pile will still grow, albeit at a much more moderate pace.

Re:Context?

[Bogtha]

when the iPhone4S eventually came, it came late and was a major disappointment

Er, no. Firstly, it wasn't late. Apple don't announce far-off release dates for the iPhone. People speculated that Apple would release June-July time, but that speculation was wrong. That's not the same thing as "it came late".

Secondly, it wasn't a disappointment. They are selling them as fast as they can make them. The trouble is that supposed "analysts" were trumpeting the iPhone 5 that could grant wishes and came with a free unicorn. Those analysts had to turn around and call it a disappointment to avoid saving face. It happens for every Apple product launch. They sold 4 million in their first three days on sale. In what world is that a disappointment?

Similarly, iOS 5 brought nothing new to the table, and contained mostly updates that simply copied long held Android features.

iOS 5 had Newsstand, which gets Apple a piece of the magazine industry, iCloud, which nets them subscription fees and improves apps across the board, and it can now be used without any computer at all, which appeals to the people who want a phone but don't care about computers. I have an Android phone, and that's not true for any of it (it's supposed to be usable without a computer, but after about six months, an update arrived that could only be installed through Windows).

Many fanboys will tell you it's different, many will tell you that I'm wrong to suggest Apple product X wasn't lacklustre as I've claimed - that's fine, but I'm merely talking from a point of view of the markets

The market has spoken and the market adores the iPhone 4S. Sales are fantastic and share price is steadily rising. You don't have to be a fanboy to see that.

Probably won't affect cash position

[busyqth]

It looks like this will cost Apple about $10 Billion a year, but their cash position has been growing faster than that recently. So, I'm guessing all it will do is slow down the rate of growth of their cash.

I seem to remember

[squidflakes]

Didn't Steve Jobs say something like "Apple will only pay dividends over my dead body."

Too soon?

When I was a boy...

[blind biker]

When I was a boy of 11 or 12 years of age, I asked about how publicly traded companies and shares work. I was told that you own piece of a company through the shares, and so you receive a share of the profits, as well.

Somehow, this basic concept got completely wiped out by most hi-tech companies since then. So much so, in fact, that when Nokia or Apple does this payments, people are a bit puzzled.

Re:They've got it backwards

[Sir_Sri]

You're thinking like a poor person. When you're rich, you buy at whatever price, but you buy enough to drive the price up even more, usually with someone else's money first, and then you sell.

In the case of Apple and their 100 billion dollar cash on hand, they're pretty much right in principle on this though. 100 billion dollars cash on hand isn't giving enough ROI, and people can make better use of that money themselves than Apple can, if apple could use 100 billion dollars for something it wouldn't have it lying around collecting interest on overnight bonds and crap like that.

The stock buyback is pretty normal, use some of the corporate cash to drive up the paper value of the company, thereby enriching shareholders without them having to pay tax. Paying a dividend of 1.7% of the value of the stock seems like they're trying to ease into this.

Order of magnitude more

[Anonymous Coward]

Not arrogant enough to call myself an expert, but using made up numbers, if you had 100 shares outstanding, and $10B in the bank, this is claiming you have nothing in the pipeline....

The problem is, Apple has $100B in the bank.

You just can't spend that kind of money, not without buying solid-gold toilet seats or other absurd assets. It's ridiculous. Apple has no problem funding ongoing R&D just out of what it makes quarter to quarter. No need to dip into the corporate savings account for that.

Buying back your own stock is basically saying, "Look,we have money to invest. We could invest it in gold, or US treasuries, or orange juice futures, but we think that the best possible investment in the world is Apple stock, so we're going to buy that."

I was hoping...

[cmarkn]

they'd just take all that cash and buy Microsoft, lop off the deadwood at the top and spin off three or four little companies to build iOS apps.