Apple's Capital Program Is Not Financial Engineering

Apr.29.14 | About: Apple Inc. (AAPL)


Apple’s capital program enhances shareholder returns.

Despite returning record amounts to shareholders, the cash balance remains extremely high.

Research shows that high net payout yield stocks outperform the market.

For whatever reason, a company can't repurchase stock or execute a stock split without market participants claiming some level of financial engineering these days. The high profile announcement by Apple (NASDAQ:AAPL) along with the Q214 earnings report brought out all sorts of sarcasm, but is it justified?

Some of the headlines from leading financial sites are as follows:

  • MarketWatch: Apple needs a big new idea, not financial engineering.
  • Motley Fool: Apple, Inc.'s 7-for1 Stock Split Is a Gimmick!
  • Seeking Alpha: Ladies And Gentleman, May I Introduce To You The Financial Engineer Of The Year: Apple, Inc.

Combined with a solid earnings beat, the tech giant saw its stock surge $43, or 8% on the news regarding returning capital to shareholders and the surprise stock split.

Shareholder Friendly Moves

Though Apple has an absurdly large cash and marketable security balance of $151 billion combined with a below market earnings multiple of around 9.5x enterprise value, the market seems surprised and disillusioned that the company would return cash in large quantities to investors. For the quarter ended March 31, the company repurchased $18 billion of stock and paid $2.7 billion in dividends. In total, the company spent roughly $56 billion on returning capital to investors over the last 12 months.

The remarkable number from the below table from Apple outlining the return of capital over the last couple of years is that the net cash position is virtually unchanged. The company has spent $66 billion on stock buybacks and dividends, yet the net cash position sits at $134 billion after sitting at $137 billion following the original $2 billion buyback during Q113.

Click to enlarge

Considering the stock remains cheap and the cash balance is consistently too large, the company announced the following changes to the capital return program:

  • Board increased the share repurchase authorization to $90 billion from the $60 billion announced last year.
  • Board approved increasing the quarterly dividend by 8% and declared a dividend of $3.29 per common share, payable on May 15.
  • The company has spent a total of $66 billion on the capital return program since the start in August 2012. The new authorization is to spend over $130 billion by the end of calendar 2015.
  • Board approved a seven-for-one stock split to begin trading on split-adjusted basis on June 9, 2014.

Not Financial Engineering

For some reason the market thinks that the only acceptable form of returning capital to shareholders is a dividend, though research continues to disprove this mindset. The net payout yield, or NPY, is still a better method of viewing value versus a dividend alone. The NPY is the combination of the forward dividend yield and the net stock buyback yield from the last 12 months. See the below yield for Apple:

AAPL data by YCharts

The top NPY stocks consistently outperform the market and the study proved that historically a stock with a top NPY is a good place to invest. With the current NPY now nearing 11%, Apple reaches close to the top of the list for stocks with valuations in excess of $10 billion.

Based on the April list, Apple now approaches the largest NPY and has plenty of ammunition to increase it. Historically, the research study suggests good results ahead for these stocks.

Dow Jones Inclusion

For whatever reason, Apple finally decided to split the stock that now sits at over $565. While a seven-for-one split is abnormal, a stock trading over $500 isn't practical for the stock market.

One valid reason for performing such a split is the inclusion in the Dow Jones Industrial Average that is price weighted and not market value weighted. In order to obtain an invitation to the list, it is highly likely that Apple needs to dramatically lower the stock price.

While logical and a clear requirement for inclusion in the index, a spokesman for Dow Jones made it clear that changes in the index are usually made after major corporate events such as bankruptcies or acquisitions. Apple may not have split for inclusion in the index, but it is still logical to keep the stock price at more normal levels.


The detractors are correct that Apple needs product innovation, but it doesn't preclude the company from repurchasing stock and splitting it. These moves are only intended to take advantage of market conditions and enhance shareholder returns. Research continues to prove that the stocks with the largest NPY and especially ones that return capital at rates in excess of 10% have an outstanding chance of outperforming the market. It is clearly rare that a company has the ability to spend over 11% of the current market value on returning capital to shareholders and still has substantially the same cash position. One might logically assume that the stock is mispriced with that ability to generate cash in relation to the current market valuation. Taking advantage of the opportunities presented by the markets isn't financial engineering, but rather intelligent and prudent moves by the Board of Directors.

Considering Apple has the ability to repeat and even increase the capital return over the next 18 months, investors should consider the stock attractively valued.

Disclosure: I am long AAPL. 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.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.