Apple's Stock Buyback And Dividend Outlook: Don't Expect Much Of An Increase

Posted: Jan 22 2014, 9:21am CST | by , Updated: Jan 22 2014, 9:26am CST


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Apple's Stock Buyback And Dividend Outlook: Don't Expect Much Of An Increase

Apple plans to report its December quarter results on Monday, January 27, and holds its shareholder meeting on Friday, February 28. Tim Cook said on the September quarter results conference call that “we will announce any changes to our current program in the first part of the new calendar year.” (Note that my family and I own Apple shares).

It would be best for Apple to update its cash return policies on its earnings call

From a timing perspective I believe it would be best for Apple to update its dividend and buyback program when it announces its financial results on January 27. Carl Icahn intends to submit a proposal at Apple’s upcoming shareholders meeting for the company to repurchase not less than $50 billion of stock by the end of September 2014. If the company makes an announcement in January management should be more in control of the debate of Icahn’s proposal before the shareholder meeting.

I expect the dividend to increase by 5% to 10%

When management formulated its options on dividends I believe they took a multi-year if not a multi-decade outlook. One key item they would be thinking about would be raising the dividend on an annual basis. Many funds and investors are looking not just for a nice dividend yield but the prospect that it will be raised. While Apple has only been paying one since August 2012 not just maintaining the dividend but raising it between 5% to 10% per year would make the shares more “valuable” to dividend oriented investors. I expect the company to announce it will raise the quarterly payment from $3.05 to between $3.25 to $3.35 or a 7% to 10% increase.

Only U.S. cash can be used for dividends and share buybacks

In fiscal 2013 Apple spent $22.9 billion on share buybacks and $10.6 billion for dividends ($33.5 billion in total). Apple took on $17 billion in debt and used $16.5 billion of U.S. cash to make up the difference. Since the company’s U.S. based cash decreased by about $3 billion for the year it generated about $13.5 billion in U.S. cash vs. about $11.4 billion in fiscal 2012.

Through calendar 2015 Apple will need over $20 billion to pay dividends and has over $37 billion remaining in its buyback program for $57 billion in total. Assuming that U.S. cash generation increases to $15 billion per year ($30 billion in total for two years) it will need to use about $27 billion of its remaining $35.5 billion that it had as of September 2013 or take on more debt.

I don’t expect the share buyback program to increase significantly

On December 5 last year Moody’s published a report that Apple could take on an additional $20 to $25 billion before it could affect its credit rating. Since this is a bit under the $27 billion the company will need to cover the current buyback program I believe the company is a bit handcuffed in the amount it can raise its dividend and stock buyback program.

Yes Apple could use more of its current U.S. cash, say $10 to $20 billion of the current $35.5 billion, and while that is a significant amount for almost any company it would only decrease the share count by an additional 2% to 4%. Management may decide to increase the buyback program but if it does I don’t think it will be any more than $20 billion especially since there are two years left on the current program and multiple events requiring U.S. cash may occur. Also I don’t believe management will want to risk a downgrade to its credit ratings.

Overall I do agree Apple should be buying as much stock as possible since I believe it is undervalued (I have a price target of $630) but I don’t believe the company should be “forced” to buy back an additional $50 billion in 2014.

Follow me on Twitter @sandhillinsight. You can find my other Forbes posts here.

Source: Forbes

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