Yesterday, Apple Inc. announced a new dividend and share buyback program. It was the largest dividend initiation to date in the S&P 500, as Apple has a market capitalization of over half a trillion dollars, and the dividend payout will be in the ballpark of $10 billion per year.
-The quarterly dividend will be $2.65, meaning that the annual dividend is $10.60. Based on a stock price of around $600, the dividend yield will be a bit under 1.8%.
-Based on the number of shares, this comes out to Apple paying a bit under $10 billion per year in dividends to shareholders. Due to the sheer size of the company this will be one of the largest dividend payouts per year of any company in the world. There are a very small number of companies, such as AT&T, that pay slightly more.
-The company also announced a $10 billion share buyback over the next three years, which therefore averages to around $3.3 billion per year. Some of this is consumed by share issuance, so this offsets the issuance of new shares and will shrink the number of shares a bit.
-Based on the company bringing in around $45 billion in free cash flow from the trailing twelve month period, the payout of around $10 billion represents a payout ratio of under 25%. But based on estimated cash flows over the next year of perhaps over $60 or $70 billion, the payout ratio could fall below 15%.
-There is therefore plenty of room for dividend growth, although the cyclical nature of innovative products means that it’s perhaps not prudent to assume Apple can maintain this level of cash flow perpetually.
-The dividends do not impede growth in the slightest. Apple’s growth has not required significant reinvestment of capital; it has all come from innovation rather than capital expenditure. Hence, the tremendous quarterly free cash flows and growing cash stockpile.
-This announcement came after speculation regarding what Apple will do with the roughly $100 billion in liquid investments sitting on its balance sheet (with no debt), which has been stockpiled through these last several years of insane profitability. It’s worth pointing out that, since the dividend and share repurchases will only consume a fairly small portion of incoming free cash flow, it looks like this enormous cash total will continue to grow.
Analysts estimates for Apple’s 2012 and 2013 EPS are around $43 and $48 respectively, and Apple has routinely soared past estimates. The company currently has a P/E in the mid teens, and these estimates would inch the valuation lower unless share price appreciation occurs. Apple’s current stock valuation is lower than that of Coca Cola (NYSE:KO), for reference. If Apple replicates its most recent quarterly performance, on average, for the next three quarters, then the valuation for the stock would be a price to earnings of a bit above 10, and a price to free cash flow of a bit under 10, which is lower than Microsoft’s (NASDAQ:MSFT) current valuation. Based on a typical discount rate regarding intrinsic valuation calculation, a P/E of 10 is generally valued for no growth. So in other words, Apple’s current valuation implies a strong number of quarters followed by flat performance. Either Apple’s growth has to stop, or the share price should increase. All Apple has to do to justify its current valuation is to continue out the year at the current pace, and then merely not shrink going forward. Any more than that should result in share price appreciation due to EPS/FCF increases.
Apple had a strong recent iPad launch, and growth opportunities could include televisions, or added media to iTunes (their cash stockpile could buy all sorts of premium media), or increased international saturation. Will Apple eventually become a trillion dollar market cap company, or will they fall out of favor as many other hardware makers have?
If I were a betting man, which is not particularly the case, I’d be bullish for Apple stock over the next several quarters. For the long term, who knows.
Full Disclosure: I am long MSFT and KO at the time of this writing.
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