Apple: Let Us Not Get Overexcited

Apr.24.14 | About: Apple Inc. (AAPL)


Apple reported great earnings but perhaps investors are making too much out of it.

Dividends, buyback and splits are great but not game changers.

With a near 10% move, the stock might have overreacted already.

Apple (NASDAQ:AAPL) last evening delivered perhaps the most "good news filled" report in recent times as Seeking Alpha has covered here. There were plenty of positives including:

  • EPS handily beating expectations.
  • Quarterly dividend being increased by 8%.
  • Buybacks being boosted by $30 billion.
  • Stock being split 7:1, a long awaited one for many Apple investors.

Apple's stock is almost always known for being unfairly treated but are investors over-reacting to the positive side this time? The last time the stock was getting so much positive attention in 2012 ended up being a disaster towards the end of the year. I like Apple and am not a bear but this article presents a few reasons why we should not get into a frenzy. Let us get into the details.

Dividend Increase:

The dividend increase of 8% is more like what you would expect from a company like Coca-Cola (NYSE:KO) that has been paying dividends for 50 years. Not from fresh dividend paying companies like Apple where a much higher dividend growth rate is expected. Even Microsoft (NASDAQ:MSFT) has managed a much higher dividend growth rate.

The 8% dividend increase is much lower than even the minimum presented in this article which analyzed Apple's potential dividend increase a month ago. This could be proving that Apple is perhaps running short on domestic cash to fund the dividends as this article explains in detail.

More dampening facts about the dividend:

  • This run up in share price to $570 has pushed the yield right back to the 2.3% level where it was before the earnings report.
  • This yield is much lower than other technology dividend alternatives like Intel Corporation (NASDAQ:INTC), Microsoft, and Cisco Systems (NASDAQ:CSCO).

Buyback: Apple also announced $30 billion more for its buyback program. Obviously that is a monstrous amount, especially when you consider the company has been buying back in 2013 and 2014 as well. But as the chart below shows, the number of outstanding shares have only been reduced by about 5% since the start of 2013. Critics might point out that the company wasn't as active in buybacks then as it seems to be now. But Apple (and quite a few other companies) is still dishing out hefty stock options to employees. Buybacks aren't as effective for investors in such scenarios.

Also, while buybacks and dividends are generally good for investors, one gets a feeling that Apple is now looking more into financial engineering to convince its investors.

Click to enlarge

(Source: YCharts.Com)

Stock Split:

  • It is almost universally believed that stock splits do not change the fundamentals of the business or the stock.
  • The split will only result in more float as the number of outstanding shares will go up to about 6 billion.
  • The whole concept of "this will make the stock more accessible to retail investors" doesn't cut it with most companies, especially with Apple. 62% of the shares are held by institutions and one just needs to take a look at the huge volume of trading in Apple in 2012 to realize this. In other words, retail investors do not matter much in determining the price movement of this stock.
  • Apple investors are perhaps no strangers to volatility even at the pre-split price levels. Splits usually end up increasing the volatility of the stock when more players "try" to play the game.

Products: Even though iPhones and Macs had a surprisingly strong quarter, iPad numbers paled in comparison. Apple has always been known for its own creative destruction where their own newer products slowly offset the older products before other companies do so. Two disturbing themes remain:

  • There has not been a new product since 2010, making it the second longest that Apple has gone on without one since Steve Jobs took over the reins in late 1990s. The iMac release in 1998 was followed by the iPod and iTunes in 2001 (those were two separate money making machines even though they were introduced in the same year, which can be used as an argument as to why they didn't have a new product till 2007). This was followed by iPhone and iPad in 2007 and 2010.
  • The continued over-reliance on the iPhone to make wonders.

Conclusion: There is no doubt that this was one of the best earnings announcement in recent times but the stock has perhaps already over-reacted as it is up 9% as of this writing. I remain on the sidelines for the time being until something concrete comes up on the product side. Investors looking for dividends and buybacks have many more alternatives in companies that do not have to keep innovating to remain relevant.

And please do not leave the typical hate messages on every non-bullish Apple article. I am not an Apple hater but a cautious Apple fan who is on the sidelines for the time being.

Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.