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Apple: Shareholder Value Creation Will Continue

June 19, 2014 | About:
Faisal Humayun

Faisal Humayun

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The journey for Apple (AAPL) has been phenomenal over the years and as the company gradually moves to a significantly high earnings base, the growth trajectory might not be as exciting as it was in the past. This article discusses the likely shareholder value creating options Apple will pursue in the foreseeable future.

As of March 2014, Apple had cash and cash equivalents of $151 billion and this cash can be utilized to create shareholder value in four ways –

Share repurchase program – Apple has already increased its share repurchase authorization to $90 billion from the $60 billion level announced last year. The big share repurchase program will create shareholder value by boosting the EPS. For the second quarter of 2014, Apple generated $13.5 billion in cash from operations. This is important to mention because Apple will continue to boost its cash position significantly on an annual basis and this implies that the share repurchase program will also be gradually scaled up. I am of the opinion that Apple will continue to purchase share not only until October 2015, but for a more extended period.

Dividends Increase – Apple currently has a dividend yield of 2.1%. I am of the opinion that the company’s dividend yield will increase significantly over the next few years considering the amount of cash the company is holding. The trend of increasing dividends is already evident as Apple has increased its dividend payout by 24% to $3.29 in April 2014 from $2.65 in July 2012. The growth in dividend has been sharp in the last quarter with Apple increasing its quarterly dividend by 8%. This increase is likely to continue and should result in a much higher dividend yield than the current level of 2.1%.

On a consolidated basis, share repurchase and dividends (total capital returned to shareholders) has increased to $20.7 billion in the second quarter of 2014 from $2.5 billion in the fourth quarter of 2012 and this increase underscores the company’s commitment to create shareholder value.

Acquisitions – With a strong cash position, Apple can also pursue attractive acquisition opportunities. In May 2014, Apple announced the acquisition of Beats Music and Beats Electronics for a consideration of $3 billion. While I talked about a recent acquisition, Apple has already made 5 acquisitions in 2014 coupled with 13 acquisitions in 2013. Small, but attractive transactions in the technology space can boost Apple’s growth. I see the company aggressively looking for more acquisition opportunities over the next few years and this is likely to aid shareholder value creation through the acquisition of exciting technologies and innovations. Acquiring companies for technological edge is not new in the industry. Google (GOOG) also has a strong acquisition driven growth strategy. In the recent past, and Apple has caught up with Google in this perspective.

Research & Development – This is one of the most critical factors when it comes to growth for a technology driven company. With the smart phone market getting more competitive, Apple has been increasingly investing in research & development to spur growth through breakthrough technologies. Apple’s R&D expense (percentage of sales) has increased to 2.7% in 2Q14 from 2.6% in FY2013 and 2.2% in FY2012. Clearly, Apple is increasingly investing in research to create shareholder value in the future. As the speculation rises on the release of Apple iPhone 6, it is believed to be a next generation handset and among the most awaited Apple products. Any drastically differentiating feature can result in strong growth. There are also speculations on other product pipeline for Apple, including smart watches and Apple TV. While these are just speculations at this point of time, Apple is certainly going all out on R&D to maintain its revenue and growth.

Apple might not record stellar revenue and EPS growth on an already high revenue base. However, with these strategies, Apple will continue to create shareholder value. I believe that Apple is attractively priced at a TTM PE of 15.5. Google might not be a direct competitor, but it is still a technology driven company and trades at a TTM PE of 29.0. I therefore consider Apple as a good investment and I believe that other than a likely stock upside, the dividends will be much higher over the next few quarters and years.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

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