Yesterday, Apple (AAPL) reported earnings and announced a dividend increase as well as a massive $50 billion increase to its buyback program, for a total of $60 billion authorized for share buybacks, which at current levels represents nearly 16% of its current market cap. [60 billion/ market cap of 377.83 billion= 15.88%] The purpose of this article is to see how companies in the technology sector that pay dividends, and have large share buybacks have performed over the past year, in comparison to other major sectors. My goal is to gain insight onto the performance of other technology companies to see what path may be ahead for Apple.
Step 1: To start I had to build a list of companies that have had large share buybacks over the past year, so I looked at the holdings for the PowerShares Buyback Achievers Portfolio ETF (PKW) to find companies with large buybacks, and 209 stocks met those criteria. I chose to use PKW because it only includes stocks that have bought back at least 5% of shares outstanding in the past 12 months. Therefore, I exported the holdings of PKW to a spreadsheet to start my search.
Step 2: I then had to see which stocks also pay a dividend, just like Apple, so I copy and pasted the ticker symbols into the FinViz Screener. Once the stocks were in the screener I selected the search criteria of dividend yield to be positive, which then gave me my final list of 115 stocks that have bought back large numbers of shares and pay a dividend. I then exported that list to a spreadsheet so I could compare each sector's 1-year price returns.
Below is a table that shows the number of companies from each sector, the average dividend yield and the average 1-year price return for each sector.
# of Companies
Average 1-yr Return
The results of my screen were very surprising, and a few items stuck out. The first item I noticed was how strong the performance financial stocks have had over the past year. I have not been a fan of financials, like many other investors, but my data is making me rethink my opinion on financials. The second item I noticed was that out of all the sectors, Information Technology had the highest yield, which, you would think would have performed well in a low yield environment, but as the return data shows, technology actually had the lowest return by far out of all the sectors. This is very telling for Apple, because as my data for the last year shows, share buybacks and dividends have not worked out that well for technology stocks.
Overall from a big picture point of view my data has led me to the conclude that on average large share buybacks and dividends for technology companies are not a good option to spur significant growth in share prices.
I believe the best model to achieve share price growth in the technology sector is capital allocations to R&D, Business Expansion, and Acquisitions. These qualities can be can be found in popular technology companies: Google (GOOG), and Amazon (AMZN).
In the case of Google, it chose to allocate resources to R&D to develop new products, or acquisitions, instead of returning cash to shareholders.
In the case of Amazon, it chose to allocate resources to improve distribution through building new fulfillment centers, and through R&D to expand their presence from an online store, into a platform [The Kindle].
Therefore, my view on Apple is not negative but not positive either. Apple does have some value for income investors because it now has a dividend yield over 3%. But as far as for share price growth, I believe the more resources Apple commits to returning to shareholders, instead of using allocating resources to R&D, Acquisitions, and platform expansion, the more likely Apple will fall into the path of other technology stocks like Microsoft (MSFT) or Cisco (CSCO).