Apple (Nasdaq:AAPL) enjoys a reputation, perhaps exaggerated but nevertheless valid, for being a company that zigs while everyone else is zagging. With Monday's announcement of a dividend and multi-year buyback plan, though, Apple did more or less what everyone thought it would do with its cash.
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While this dividend will now open up new prospective investor groups for the stock, it seems highly unlikely to impact the company's future growth or investment plans. With leading technology in multiple markets, Apple looks as though it will be in position to continue adding to its already-prodigious cash pile in the coming years.
Sharing the Wealth
Apple has already racked up major capital gains for investors who've been in the story for some time, but now the company is going to share even more of its success. Over the next three years, Apple will be handing over about $45 billion in cash to shareholders - in the form of a $10 billion, three-year buyback program, and a quarterly dividend that will initially total $2.65 per share (or a not-so whopping 1.8% yield based on Friday's close).
By and large, Apple announced exactly what the majority of analysts and commentators expected that it would. Although there was an outside shot at a one-time special dividend, an ongoing dividend arguably makes more sense - at least in terms of expanding the potential shareholder base to include those whose mandates or preferences restrict them to regular dividend-paying stocks. That said, there just may be a slight window of potential disappointment, as expectations for the dividend yield were generally in the 2 to 3% range, though the share buyback may assuage that concern.
Cash from Here, Cash Still over There
Not surprisingly, this money will come from the company's domestic cash hoard. While about two-thirds of Apple's enormous net cash balance (nearly $100 billion) is held overseas, the company does not want to pay the taxes that go with repatriating that cash. Given that Apple pays a very low effective tax rate on its overseas earnings, any such repatriation under normal rules would take a big bite out of that cash hoard.
Consequently, Apple has a few options for that overseas cash. First, the company could just repatriate it and write a check to Uncle Sam, but that's not going to happen. Second, the company could use that cash for acquisitions - principally for companies that are headquartered outside of the United States. Lastly, the company could consider borrowing money (issuing bonds), using that to return more capital to shareholders, and wait for an eventual "tax holiday" that would allow it to repatriate funds more cheaply.
Little will Change in the Meantime
In the meantime, Apple is going to just keep on being Apple. As the latest iteration of the iPad suggests, Apple still has a compelling value and performance proposition to make to consumers, and Samsung, Amazon (Nasdaq:AMZN), Google (Nasdaq:GOOG) and Research In Motion (Nasdaq:RIMM) have their work cut out if they hope to close that gap.
Perhaps equally to the point, Apple is likely to continue to accumulate cash at a prodigious rate. With free cash flow likely to exceed $40 billion in each of the next two years, Monday's announcement may be only the beginning of what Apple could do in terms of returning capital. That said, Apple still has big plans for the future, and a fair bit of that cash is going to stay on the balance sheet as "dry powder" for ongoing M&A of emerging technologies and key IP. For related reading, see Free Cash Flow: Free, But Not Always Easy.
The Bottom Line
As I have written before, modeling Apple's potential free cash flow streams almost feels absurd, as the numbers get so big so easily. Sooner or later the company will run out of equally-profitable new revenue opportunities or the competition will close some of the gap. In the meantime, though, it's hard to find fault with Apple either on the basis of execution or valuation.
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.