- Apple's earnings report is a big deal and represents a shift in shareholder-friendliness.
- There are five key reasons Apple's earnings report was so impressive.
- Above all, this latest peek inside of Apple shows that the money-making machine is alive and well.
For a while it has been tough to own Apple (NASDAQ:AAPL). It seemed for months like the most exciting thing to happen to the stock was when someone like Carl Icahn came along to try to get Apple to do something.
Whether or not it was Icahn's doing I'll never know or really care. But now Apple investors have something to get excited about.
Though the headline numbers are huge, this earnings report was much bigger than the headline numbers. Yesterday's announcement was filled with news that should be music to the ears of shareholders.
I've highlighted the five major reasons that the Apple earnings report is such a big deal.
1. Apple destroyed analyst expectations for EPS and revenue
Apple reported diluted earnings per share (EPS) of $11.62 compared to analyst estimates of $10.18. The company also destroyed its revenue estimates. Apple reported $45.6 billion in revenue compared to analyst estimates of $43.53 billion.
But Apple's revenue numbers and EPS were huge any way you slice it. Exceeding revenue expectations by $2 billion is absurd. Many publicly traded companies don't earn that much in a year. Many aren't even profitable!
2. Apple's gross product margin has stabilized
After peaking in 2012 at 47.37%, Apple's gross product margin has fallen significantly. Considered an important measure of the health of a company's profitability, it's no coincidence that Apple's stock price peaked shortly after the margins began to fall.
Apple's margins bottomed in the second quarter of 2013 at 36.87%, a huge decline from the peak just 15 months earlier. Yesterday Apple announced that the gross product margin in the last quarter rose to 39.3%, which means three consecutive quarters of rising margins.
AAPL data by YCharts
Apple's ability to turn around its gross product margin will provide the fuel to send the stock higher.
3. Apple boosted its stock repurchase program
Last year Apple began to repurchase its own stock. The company announced $60 billion in planned repurchases to be completed by the end of 2015. Tim Cook announced yesterday that Apple has already repurchased $46 billion of the authorized $60 billion.
As Tim Cook reiterated that Apple executives and its board of directors believe the company to be undervalued, he announced an additional $30 billion in share repurchases. This is a 50% increase to what was already the largest stock buyback program ever. What it means is that between now and the end of next year, Apple will likely double what it has already invested in its own shares.
As the number of shares outstanding continues its precipitous fall, the value of my shares rises. Since I think Apple is a great value at these prices, I'm more than happy to let Apple buy a few dozen billion dollars worth of stock.
And if "a few dozen billion" seems ridiculous that's because it is. Apple's buyback program alone would be among the world's 100 largest companies.
AAPL Shares Outstanding data by YCharts
4. Apple announced a 7:1 stock split
Apple announced yesterday that it would split its stock, the first time it has done so since 2005.
Stock splits aren't intended to change the value of a company. Rather, they have more of a psychological effect on investors.
A 7:1 split makes a single $700 share of stock turn into seven $100 shares of stock. The investor didn't make or lose any money, but suddenly buying an additional share only costs $100 where it had cost $700 the day before.
Still, Apple's upcoming stock split is a big deal. Per yesterday's close of around $525, a 7:1 split will make Apple a $75 stock. Even if the price rises all the way to $600 before the split takes effect in June, each share will cost around $85. This is far more accessible to retail investors than the current price.
By making the stock trade at a more reasonable price, Apple should regain the attention of retail investors as it did in 2010-2012. Apple may also be included in the Dow Jones Industrial Average.
Better yet, the move suggests Apple is now willing to do what it must to appease investors.
5. Apple boosted its dividend and plans to continue doing so
Yesterday Apple raised its dividend for the second time in two years. All by itself, the 8% dividend hike is great news. But more important was the commentary by Apple executives that the company plans to increase its dividend every year.
When I heard that final bit on the conference call my ears perked up. I know the implications of such a statement.
Apple is now a dividend growth stock.
I had previously considered Apple to be a soon-to-be dividend growth stock, that's why I personally own it in a retirement account with dividends reinvesting. But confirmation that Apple's management team is taking it down the path of dividend growth stocks is terrific news.
The Bottom Line
A huge earnings beat with quality metrics, an 8% dividend boost, a 50% increase to the repurchase program and a stock split are certainly enough to move the needle for Apple shares today.
But I think what Apple just put in place will attract investors, not just traders.
What I heard yesterday is exactly what I and many other Apple investors have been waiting for. A cash-rich, shareholder-friendly, money-printing machine is exactly the kind of company I want to own for a long time. And that's exactly what is going to attract new investors to Apple right now and send shares flying higher.