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By Joseph Morrison

Introduction

Apple (NASDAQ:AAPL) has recently unveiled a new way to reward shareholders with an enhancement to the existing dividend and repurchase plan. The sum total is that since August 2012 and through to December 2015, Apple will repurchase $60 billion worth of common stock which represents a $50 billion increase from the original $10 billion level. In addition, Apple has been paying a quarterly dividend of $2.65 which has been increased to $3.05 per share. This is all part of a goal to return $100 billion to shareholders by the end of 2015.

In prior articles, it has been advocated for Apple to take the substantial pile of cash, which is now in the $145 billion range, and use it to make strategic acquisitions to fend off the competition or invest more heavily in research and development in order to produce more disruptive products such as the original iPod, iPhone, and iPad. An observation one could make about Apple is that its forte is in creating original products which have substantial margins. Once these products become commoditized, Apple becomes a laggard in the market. This has played out historically with the personal computer and now again with smartphones as Samsung's Galaxy series has surpassed the iPhone line in sales.

In the face of eroding market share, the main "ace in the hole" for Apple has been the large cash position on the balance sheet. Apple could always go outside the firm and buy growth to complement its products. Apple could integrate vertically if necessary and Apple would always be in a position to weather any market condition. This massive reduction in cash weakens Apple's position and ability to stay nimble in a changing and challenging business environment. This massive cash disbursement signals to some investors that the "party is over." Apple's stock price reached the stratospheric levels based on rapid growth. The fact that Apple is distributing cash is a signal that it is out of ideas, despite the conference call promises of "great new products".

Analysis of Program

The purpose of this article is to fully analyze whether this plan is the best way to maximize shareholder value. In order to accomplish this, the current plan must be analyzed. The buyback analysis is below:

Calculating Buyback Yield

First Portion:

$10,000,000,000

Stock Price at Program Origination:

$478.20

Approx. Shares Outstanding At Orig:

929,277,000

Approx. Market Cap:

$444,380,261,400.00

Buyback Yield:

2.25%

Second Portion:

$50,000,000,000

Stock Price at Program Origination:

$406.13

Approx. Shares Outstanding At Orig:

939,208,000

Approx. Market Cap:

$381,440,545,040.00

Buyback Yield:

13.11%

Weighted Average Yield:

11.30%

The forward looking analysis uses the stock price at program origination because this is what the management was looking to return to shareholders. The actual yield will fluctuate as the program progresses due to fluctuation in share price and timing of the purchases. The dividend analysis is below:

Calculating Dividend Yield

Declared

Amount

Share Price

23-Apr-13

$3.05

$406.13

23-Jan-13

$2.65

$514.01

25-Oct-12

$2.65

$609.54

24-Jul-12

$2.65

$574.97

Totals:

$11.00

$526.16

Trailing Annual Yield:

2.09%

Projected Annual Dividend:

$12.20

3.00%

2012-2015 Yield:

2.70%

This analysis uses the assumed repurchase price as the basis for determining future yield. The price, obviously, will fluctuate and making assumptions for price movements will only compound the approximation of this analysis. With this information, we can then deduce the weighted average rate of return for the investor of these projects:

Calculating Program Yield

Weighted Average Repurchase Yield:

11.30%

Weighted Average Dividend Yield:

2.70%

Weighted Average Total Program Yield:

7.86%

From this, a net present value analysis can be done. As is the case with the prior analyses, assumptions must be made.

NPV Analysis of Apple Cash Distribution Plan

2012

2013

2014

2015

Number of Shares Outstanding

929,277,000

925,199,226

884,734,985

844,270,744

Less Repurchased Shares

-4,077,774

-40,464,241

-40,464,241

-40,464,241

Total Shares Remaining

925,199,226

884,734,985

844,270,744

803,806,503

Share Price

$478.20

$406.13

$406.13

$406.13

Average % Yield Per Share

2.25%

4.37%

4.57%

4.79%

Average $ Yield Per Share

$10.76

$17.76

$18.57

$19.47

Program Yield

$9,956,118,853.69

$15,715,000,850.34

$15,682,128,496.57

$15,646,105,127.91

Annual Dividend per Share

$11.00

$12.20

$12.20

$12.20

Dividend Tax Rate

15%

15%

15%

15%

Dividend Cash Per Share

$9.35

$10.37

$10.37

$10.37

Annual Program Dividend

$8,650,612,763.10

$9,174,701,795.45

$8,755,087,617.28

$8,335,473,439.12

Total Benefit to Shareholders

$18,606,731,616.79

$24,889,702,645.79

$24,437,216,113.85

$23,981,578,567.02

Risk-Free Rate

0.35%

0.35%

0.35%

0.35%

Discounted Cash Flow

$18,606,731,616.79

$24,829,393,036.13

$24,343,431,945.44

$23,889,543,026.12

Reduction of Firm Capital

-$100,000,000,000.00

NPV to Shareholders

($8,910,614,803.70)

The first assumption is discount rate, which is set at 0.35%. This is the current yield on the 3-year Constant Maturing Treasury [CMT] and this will be the constant when conducting analysis of comparable projects. Additionally, there is the glaring assumption of the constant share repurchase price of $406.13 upon which the amount of shares repurchased is based. Thus far, Apple has given back $7.472 billion in dividend payments and spent $1.95 billion on the repurchase program. The shares were repurchased during the 4th quarter of calendar 2012 and thus far, 4,077,774 shares have been repurchased at an average price of $478.20 per share. The reason for this assumption is that the total repurchase yield is based upon this assumption and this allows the analysis to stay constant. Also note that there is no issuance of stock which is inaccurate given that the amount of shares outstanding actually increased on the balance sheet. This is done because options exercise is impossible to forecast, especially with American style options which can be exercised at any time by the long holder. Given that this would have a dilutive effect on this program, this omission is a favorable one to Apple and works against the thesis of this report.

Given those assumptions and taking into account the reduction in capital to the firm, this actually turns out to be a negative project to shareholders. Despite having a greater stake in the firm and receiving a greater dividend, this project will ultimately harm the shareholder as Apple's capitalization will decrease by such a dramatic amount.

Conclusion

It's too late now for management to go back on this program but this is not a win for shareholders. Given the reduction in Apple's cash, this program will cause more harm to the shareholders than it does good. On the surface, investors like dividends and this program is an attempt by Apple to illustrate that it is now a value stock. By taking this route, management is sending all the wrong signals and doing a disservice to the shareholders. I recommend that it is time for shareholders to look elsewhere for the tech company in their portfolio and I recommend Apple to be a sell in light of this program.

Source: Apple's Shareholder Program: The Day The Music Died

Additional disclosure: Business relationship disclosure: The article has been written by Wall Street Trading, a group of junior market analysts. Wall Street Trading is not receiving compensation for it (other than from Seeking Alpha). Wall Street Trading has no business relationship with any company whose stock is mentioned in this article.