By the end of last year, I wrote this article about Apple (NASDAQ:AAPL). I argued that Apple is just one year away from becoming a dividend stock instead of a growth stock. I based my arguments on the traditional business life cycle and several developments and events that occurred last year. Further, I predicted that Apple's dividend and share buyback program would be a hot item of discussion during the first quarter of this year, and that Apple would announce new products.
Now, half 2014, most of my assumptions proved to be in line with recent developments. Therefore, I still believe Apple is in a transition phase to become a dividend stock instead of a growth stock. In this article, I will provide an update of my previous article, and I will argue that Apple's dividend and share buyback program will become increasingly important for Apple and its share price and, therefore, for investors as well.
Capital return and stock split
As I expected, Apple's capital return was a very popular subject of discussion among investors during the first months of this year. First, investor Carl Icahn backed off in his fight with the company over an increased buyback program. According to Reuters, Icahn was especially pleased with Apple's increased effort to repurchase shares by the end of January. For example, Apple's CEO, Tim Cook stated in this interview with The Wall Street Journal: "Apple repurchased $14 billion of its own shares in two weeks' time." As a result, Apple was close to completing its initial buyback program much sooner than expected, resulting in speculations regarding an increased buyback program.
On April 23, 2014, Apple announced a substantial increase in its capital return to shareholders (see the press release). First of all, Apple increased its quarterly dividend payments by 7.9%. Further, Apple did announce an increase of its current share buyback program to $90 billion from $60 billion authorized in 2013. I was particularly pleased with the announcement that Apple planned for another debt offering to finance the increased buyback program. Apple planned to raise another $17 billion in a corporate bond sale (source: WSJ.com). As I explained in this article, financing a share buyback program with debt provides additional value for the company's shareholders.
Finally, Apple announced a seven-for-one stock split together with its increased quarterly dividend payments and share buyback program. Although Apple's share price was relatively high, the seven-for-one stock split announcement was not generally expected by the market. However, investors were positively surprised. Since the announcement on April 23, 2014, Apple's shares surged almost 25%. It is fair to say that the market received the increased dividend, larger share buyback program and seven-to-one stock split very well. The market's positive reaction strengthens my opinion that Apple is becoming a dividend stock instead of a growth stock.
As I expected, investors' focus shifted from Apple's capital return towards new products immediately after the announcement on April 23, 2014. Among the speculations were the introduction of the long-expected iWatch and iTV. Tim Cook fueled the speculations by confirming that Apple will introduce new products in 2014 (source: WSJ.com). According to Reuters, the introduction of the iWatch seems the most likely outcome, and production is already set for July 2014. In the meantime, Apple introduced a new and cheaper iMac model (source: 9to5mac.com), and it is rumored that Apple ordered 68 million new iPhone 6 models for the introduction later this year (source: businessinsider.com).
However, not the expected introduction of the iWatch or the new iPhone 6 model, but Apple's $3 billion acquisition of Beats was the most remarkable event during the first six months of this year. Beats, the high-end headphone business and streaming music provider, will strengthen Apple's iTunes position to become a leading streaming music provider. Further, Beats fits Apple DNA perfectly when it comes to developing high-end and quality products. Therefore, both of Beats co-founders, Jimmy Iovine and Dr. Dre, will join Apple after the deal is completed in Q4 of this year.
In my opinion, the acquisition of Beats is another play for Apple to diversify products within its current business model. Music has always been an important factor for Apple, given the groundbreaking introduction of the iPod and the current importance of iTunes. Apple recognizes that streaming music will become more and more important. Therefore, among other reasons, the company acquired Beats. However, is Apple the big innovator it was several years ago? Buying a music streaming provider is not as groundbreaking as the introduction of the iPod. In my opinion, the diversification of Apple's business is part of the maturity phase in the business life cycle (see my previous article), rather than the growth phase.
Overall, I still stand behind my initial analysis that Apple is transforming into a dividend stock instead of a growth stock. I find that the strong positive reaction after the dividend, buyback and stock split announcement is an indicator for the transformation process. Further, I believe Apple is not the big innovator as it was several years ago. In my opinion, Apple's recent acquisition of Beats, the introduction of the iWatch and the new iPhone 6 model are part of the maturity phase in Apple's business life cycle. As a result, the company's dividend payments and share buyback program will become more and more important in the near future.
Disclosure: The author is long AAPL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.